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
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