Corporate Debt Review

Warren Resources Files Chapter 11

Warren Resources filed for Chapter 11 bankruptcy protection last week in Texas, sporting $545 million in debt compared to $230 million in assets. The company has proposed a debt-for-equity deal with Blackstone’s debt group, GSO Capital Partners, to swap $248 million in debt owed to GSO for an 82.5% stake in Warren. In exchange, GSO will provide $20 million in DIP financing and a $130 million loan on conclusion of the bankruptcy case.

There were earlier indications that Warren was having problems. The company opted not to make a $7.5 million interest payment on its 9.0% 2022 notes at the beginning of February, and a week later said bankruptcy was in the cards if the company could not work out a restructuring deal during the resulting 30-day grace period.

In the early part of the year, our modeling suggested the company was burning through cash at more than $16 million per quarter while sitting on just $26 million in remaining liquidity, which would have driven Warren to insolvency sometime around mid-Q3 2016. But before the company would have run out of cash organically, we were anticipating a 45% borrowing base cut to Warren’s $250 million credit facility which we expected to result in a $100+ million deficiency this quarter. Unfortunately Warren had bigger fish to fry than finalizing new terms with its lenders, but the end result wound up being the same.

 

Warren Resources – Cash Burn vs Liquidity over time

US$ Million Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Cash Burn -324.5 -18.2 -22.7 -6.1 -22.6 -21.0 -16.1 -16.0
Liquidity 106.1 73.0 74.3 45.7 39.8 42.1 26.0 -102.6

Source: ECRG, Company SEC Filings

 

ECRG modeling gave indicators as far back as Q4 2014

ECRG’s Quarters-To-Insolvency (QTI) metric in our Corporate Debt Review was also flashing red flags for the company. QTI back-testing shows ECRG’s model anticipating insolvency for Warren at around this time (to within +/-1 quarter) long before recent events, however. We’ve viewed Warren as at-risk since the early days of the crude collapse—as far back as Q4 of 2014 when we projected the company might run out of cash in early 1Q16.

Warren Resources – QTI over time

Warren Res - QTI over Time

About the Author

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Sean Levine is Director of Research and Product Development at ECRG. He is an energy, securities and policy analyst with eight years of experience tracking the oil and gas industry. Prior to cofounding ECRG, Levine spent four years as a senior analyst at PLS, Inc., a middle-market land brokerage and oil and gas data and analytics firm. While at PLS, Levine’s coverage areas included oil and gas prices, capital markets and oilfield services, and he authored all content and oversaw production of the firm’s three newsletters on those topics. Before PLS, he spent four years conducting policy and equity research at DeMatteo Monness, a boutique primary research firm and broker-dealer servicing the institutional investment community, culminating as Senior Research Director and co-lead of the company’s Washington, DC office. While at DeMatteo, Levine focused on the energy sector, with emphasis on oil and gas, services, and alternative energy companies, legislation and regulation. Levine holds Series 7, 63, 86 and 87 securities licenses; he also holds a J.D. and is licensed to practice law in West Virginia. Additionally, Levine is the Chairman and co-founder of a privately held oilfield services and industrials-focused trucking concern.