Denbury Resources Heads Towards Restructuring

Denbury Resources Heads Towards Restructuring

Denbury Resources (NYSE:DNR) looks set to become another energy bankruptcy after skipping an $8 million interest payment on June 30 for its 6.375% convertible senior notes due 2024.

With $636 million in debt maturing in 2021, there wasn’t much of a path for Denbury to escape restructuring, especially with oil still around $40. Restructuring is likely to result in nearly all (if not all) of its new equity going to its second-lien noteholders. Denbury appears likely to be in reasonably good shape post-restructuring, as it has only a modest amount of credit facility debt and its estimated breakeven point would be reduced to around $45 WTI oil after the elimination of most of its interest costs.

Denbury’s current common stock would only be worth a few cents per share after restructuring at best and has a significant probability of being worth nothing.

Denbury’s Credit Facility

Denbury’s credit facility is in pretty good shape. The borrowing base for its credit facility was reaffirmed at $615 million on June 26, although there is a temporary limit of $275 million in borrowings plus up to $100 million in outstanding letters of credit. This limit is in place until the fall 2020 borrowing base redetermination and appears to be an attempt to prevent Denbury from borrowing too much under its credit facility before it restructures.

Denbury subsequently drew $200 million under its credit facility on June 29, resulting in it having $265 million in outstanding borrowings. The $200 million in additional cash should allow Denbury to make it through restructuring without needing additional DIP financing. Due to its relatively low amount of credit facility debt (net of cash), Denbury probably doesn’t need to seek out new money to pay down that credit facility debt.

Overall Debt Situation

Denbury has $265 million in credit facility debt now, along with $200 million in newly accessed cash and a $29 million working capital deficit from the end of Q1 2020 (excluding derivatives and current maturities of long-term debt).

Denbury also has $164 million in pipeline financing debt that I assume will remain as is through restructuring.

Other long-term debt consists mainly of its second-lien notes, which represent 76% of its long-term debt.

$ Million
Second-Lien Notes $1,593
Convertible Notes $246
Subordinated Notes $245
Total $2,084

Given both the large combined size of the second-lien note maturities and its superior position in the capital structure, the second-lien notes are likely to end up with nearly all (95+%) of Denbury’s new equity.

Recoveries for the lower classes in the capital structure are likely to consist mostly of warrants that have strike prices that are equivalent to at least a full recovery for the second-lien notes.

Notes On Breakeven Point

With minimal interest costs going forward, it appears that Denbury may be able to reach breakeven cash flow while maintaining production at around $45 WTI oil. It may need high-$40s WTI oil to be able to put some funds towards its CCA project in this case.

Denbury’s post-restructuring breakeven point would be significantly improved by the elimination of most of its interest costs. The estimated reduction in interest costs would reduce Denbury’s oil breakeven point by around $10.

Conclusion

Denbury Resources appears very likely to restructure after skipping a small $8 million interest payment on its convertible notes. It also drew $200 million on its credit facility just prior to skipping that payment in order to give itself a large amount of cash on hand to get through the restructuring process.

Denbury’s restructuring is likely to result in the second-lien notes ending up with nearly all of Denbury’s new equity. Denbury would be relatively healthy post-restructuring with only a modest amount of credit facility and pipeline financing debt. The lowered interest costs would reduce the estimated oil breakeven point to around $45 WTI oil.

Denbury’s common shares are a sell at current levels. In restructuring, the company’s current equity would be expected to receive anywhere from 0% to 3% of new equity (with 0% being a significant probability). Getting 3% of new equity would make its current shares worth around $0.04 each.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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