Seventy Seven Energy ‘comfortable’ with liquidity but will exercise $100 million accordion

By Paul Deckelman

New York, May 5 – Seventy Seven Energy Inc. is “very comfortable” with its liquidity position, its chief executive officer said Tuesday – but it will still look to augment that position by exercising an accordion feature on its current term loan agreement.

CEO Jerry L. Winchester said on the company’s 2015 first-quarter conference call that this move will provide another $100 million of liquidity to the Oklahoma City-based oilfield services provider, which was formerly part of natural gas giant Chesapeake Energy Corp. before its spinoff last July.

Winchester said that the liquidity move, plus Seventy Seven’s “proactive” shifting of capital expenditures originally budgeted for this year to 2016, will leave the company “well-positioned to weather the storm the industry is currently experiencing and take advantage of the opportunities that will arise.”

Seventy Seven’s chief financial officer, Cary D. Baetz, told analysts on the conference call that the company had given notice to its existing lenders under the term loan agreement to request $100 million of junior-lien incremental term commitments.

“We expect this to close this week, and we plan to use this to bolster our liquidity and to give us some financial flexibility,” he said.

The company entered into the $400 million seven-year covenant-light term loan B facility late last June, just before its spinoff from Chesapeake. The loan, due in 2021, currently bears interest at 300 basis points over Libor with a 75 bps Libor floor, although there is a provision that would step down that rate to Libor plus 275 bps in the event the company gets its leverage ratio of net debt as a multiple of trailing 12-month adjustable EBITDA down below 2.75 times.

According to an investor presentation the company put together for use with the latest financial data, as of the end of the 2015 first quarter on March 31, $374 million was outstanding under that loan.

Bonds dominate structure

The loan was part of a capital structure that also included $650 million of 6 5/8% senior notes due 2019 that the company sold back in 2011, when it was still known as Chesapeake Oilfield Operating LLC, and $500 million of 6½% senior notes due 2022 sold under its new name last June.

Baetz said that as of the end of the quarter, the company also had $65.3 million of outstanding borrowings under its $275 million asset-based revolving credit facility, although by May 1, the revolver borrowings had been reduced to $35.8 million, which included $5.8 million of letters of credit. Interest is 3.75% on the revolver borrowings and 1.5% on the letters of credit.

The balance sheet showed long-term debt less current portion of $1.61 billion as of March 31, up sequentially versus $1.60 billion at the end of the 2014 fiscal year on Dec. 31. Current portion stood at $4 million at the end of both quarters. Cash and equivalents at the end of the first quarter had grown to $3.97 million from $891,000 at year’s end. Baetz said the company had about $10 million of cash on hand as of May 1.

He said that Seventy Seven is targeting total capital expenditures for 2015 of around $200 million, most of that considered to be “growth capex” – the construction of nine new drilling rigs for oil and natural gas – with a smaller portion considered to be “maintenance capex” for keeping already existing equipment operating.

“We expect that this growth capital expenditure will be funded from cash from operations and borrowing under our revolving credit facility,” the CFO said. “Once we have completed our planned growth capital expenditures, we will shift our focus toward using excess cash flow from operations to reduce our outstanding long-term debt.”

How to spend $100 million?

During the question-and-answer portion of the call that followed the formal presentations by Winchester and Baetz, an analyst noted that the company’s bonds had been “trading around in the 50s” and wanted to know if there were any plans afoot to do “some kind of alternative funding and take back the bonds at a cheap price.”

Baetz noted that “the bonds obviously have traded up continuously over the last couple of weeks or so.” The Seventy Seven Energy 6½% notes due 2022 , which had been trading around 48 bid on April 1, closed out April at 58¼; they got up to 65 bid on Tuesday before finally ending at 63 7/8, still up more than 5 points on the day. Meanwhile, the former Chesapeake Oilfield Operating 6 5/8% notes due 2019, which were trading at 76 on April 1, ended April at 81 5/8 bid, got as good as 90 on Tuesday and were seen going home at around 87 bid, also a 5-point gain on the day.

He further explained that “the reason we’re going after the $100 million is to ensure that we have more-than-adequate liquidity and also to give us the ability to proceed with some strategic options, and that could include debt or other activity in the marketplace.”

He continued that “the balance sheet is OK. Obviously, more is better when it comes to liquidity, and we thought that at this point in time, it made sense to take the accordion and use the accordion to give us the flexibility around liquidity and to enhance the balance sheet to give us some chances to do something more strategic.”

Although not specifically mentioned on the conference call, one possibility could be calling the 6 5/8% notes for redemption. They first become callable on Nov. 15 at a price of 103.313. The 6½% notes do not become callable until July 2017, and their first-call price is 104.875.

The CFO said that “we will continue to focus on enhancing our liquidity and strengthening our balance sheet so we can add value when the market turns.”

One of the analysts raised the possibility of Seventy Seven using its enhanced liquidity to acquire assets at favorable prices and asked whether the company was seeing anything right now that it might like to buy or whether the $100 million was more “option value” to perhaps be used further in the future.

Baetz said that the latter scenario was more the case “at this point in time.”

He said that looking at potential assets, “right now, the bid-ask [spread] is still too wide.”

He said the company does not want to sound like a pessimist, “but the second and third quarters are going to continue to have some challenge to it.”

But at that point, he projected, “I think you’ll see that bid-ask narrow and have something of value show up.”

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