On December 12, 2018, Parker Drilling Company and its subsidiaries (“Debtors”), oilfield service companies headquartered in Houston, filed pre-negotiated chapter 11 cases in the United Stated Bankruptcy Court for the Southern District of Texas. The Honorable Marvin Isgur is presiding over the cases.
The Companies operate in two lines of businesses: (a) drilling services (i.e., oil, natural gas, and geothermal wells); and (b) rental tools and well services to E&P companies, drilling contractors and service companies.
As of the filing date, the Debtors’ consolidated long-term debt obligations totaled approximately $585.0 million, which consisted solely of prepetition unsecured notes issued by the Debtors. In addition, the Debtors had 500,000 shares of outstanding preferred stock and 9.4 million shares of outstanding common stock.
The Chief Restructuring Officer stated that the filings were precipitated by adverse macroeconomic trends in the oilfield services industry, including the prolonged downturn and volatility in commodity prices that has reduced demand for oilfield services and placed downward pressure on the Debtors’ revenues.
Operating in this adverse macro-environment has negatively impacted the Debtors’ liquidity. Their cash position declined steadily through 2017 and 2018, and was expected to deplete below a minimum sustainable level in 2019.
At the same time, the Debtors also faced diminishing availability under their $80 million ABL credit facility, due to reduction in collateral value and new liquidity covenants.
In addition to liquidity concerns, the Debtors further faced near-term maturities from a portion of their prepetition unsecured notes, which would have been hard to refinance due to the Debtors’ overleveraged capital structure (5.0x).
While the Debtors undertook several cost-cutting initiatives prepetition, they soon realized that what they really need was a material capital investment to modernize their assets and technology and thus remain competitive.
The Debtors also evaluated a series of out-of-court transactions, but determined that nothing adequately resolved their capital structure or liquidity issues.
Rather than simply wait around for a market recovery for oil & gas, or enter into inferior transactions without addressing the viability of the Debtors’ financial issues, the Debtors negotiated a comprehensive financial restructuring that would reduce leverage, extend maturities, provide a recovery to all stakeholders and increase liquidity.
The Debtors commenced their chapter 11 cases with key creditor and equityholder support for a pre-negotiated chapter 11 plan, which the Debtors hope to confirm by March 2019.
The Debtors’ Plan proposes a deleveraging of the Debtors’ balance sheet by approximately $375.0 million, through a conversion of the $585 million in prepetition notes to (a) equity in the Debtors and (b) a new $210 million secured term loan. The Plan also proposes to inject $95.0 million of fully-committed new equity capital through a rights offering, which is backstopped by certain of the prepetition noteholders of the Debtor. The Plan further proposes to provide existing shareholders with an opportunity to obtain a recovery (i.e., new ownership in the Debtors) that they likely would not otherwise be entitled to receive. The prepetition noteholders, preferred shareholders and common shareholders are all given an opportunity to participate in the rights offering and thereby acquire a higher percentage of ownership in the Debtors.
Another critical component of the Plan is that the Debtors are receiving a $50.0 million debtor-in-possession financing facility, and a $50.0 million committed exit financing facility (with the ability to increase the exit facility to $100.0 million). The Debtors anticipate that the DIP facility will provide them with sufficient liquidity during the bankruptcy and the exit facility, coupled with the new equity capital, will provide them with sufficient liquidity upon emergence.
Finally, the Plan proposes to pay all trade debt in the ordinary course of business, in order to minimize any potential adverse effects to the Debtors’ businesses, customers and trade partners as a result of the bankruptcy.
Sounds like a great way to save an 80+ year old Company.