Stallion Oilfield Services is the latest belated casualty of the oil bubble pop. Under the sage advice of the dynamic duo of Kirkland & Ellis and Miller Buckfire, the company filed a prepakcaged bankruptcy in Delaware earlier today, according to which the company would eliminate $515 million of debt obligations. From the press release:
The restructuring agreement includes a lock?up agreement with holders of more than 90% in principal amount of its secured obligations and more than 74% in principal amount of its unsecured bridge lenders and more than 88% in principal amount of its unsecured noteholders as well as more than 68% of equity holders supporting the restructuring. The terms of the restructuring agreement provide that (a) the Company’s secured lenders would receive approximately $25 million in principal payments permanently reducing the Company’s obligations outstanding under the Company’s secured credit agreement, (b) approximately $259 million in obligations outstanding under the Company’s unsecured bridge loan agreement and approximately $284 million in obligations outstanding on account of the 9.75% unsecured notes due February 1, 2015 would be converted on a pro rata basis for 98% of the common equity in the reorganized Stallion, and (c) the Company’s existing equity holders would receive 2% of the common equity and warrants to purchase 1% of the common equity in reorganized Stallion.
The accompanying disclosure statement provides a good glimpse into how the crude bubble pop has impacted the firm (and many others, which will likely follow suit to moderate their untenable debt loads):
The Downturn in the United States Oil and Natural Gas Industries
Since June 2008, the United States oil and natural gas industry has experienced an unprecedented
decline in gas prices and domestic rig count. Natural gas prices have plummeted nearly 75% during the
period from June 2008, when natural gas was over $13/MMBTU, to just over $3/MMBTU in
August 2009. With almost 70% of domestic drilling rigs aimed at natural gas reserves, the impact was substantial. Indeed, total average domestic rig count decreased over 55% during the period from nearly
1,950 in September 2008 to less than 850 in June 2009.
Moreover, despite the reduced rig count, technological advances in natural gas drilling practices caused domestic natural gas supplies to increase, further reducing natural gas prices and compounding the problem.
The Collapse of the U.S. Credit Markets
The substantial deterioration in the oil and gas markets was followed by the rapid softening of the economy and tightening of the U.S. financial markets in the second half of 2008, which resulted in the effective collapse of the U.S. credit markets. In the face of such market conditions, Stallion withdrew its application for an initial public offering in January 2009. As has been widely reported, the U.S. financial markets did not show much sign of significant improvement through the first three quarters of 2009.
Deterioration of Stallion’s Financial Performance
The adverse market conditions have taken a toll on Stallion’s financial position over the last year. With fewer rigs to service, market competition in the oilfield services industry has intensified as Stallion and its competitors seek to provide services to the remaining drill sites. This increased competition has led to competitive price reductions and further erosion in profit margins.
In 2008, Stallion’s service revenue totaled $607.4 million. Through June 30, 2009, Stallion has recorded service revenue of only $181.1 million, down from $288.3 million during the same six month period in 2008—a drop of 37.2%. Moreover, Stallion’s Adjusted EBITDA for the six months ending June 30, 2009, was only $37.3 million, down from $74.0 million during the same six month period in 2008—a drop of 49.5%.
Stallion’s Out-of-Court Restructuring Initiatives
In response to the downturn in the oil and natural gas industry and Stallion’s depressed financial performance, Stallion embarked on a comprehensive operational restructuring to right-size its service portfolio and workforce. These efforts included a bottom-up analysis of Stallion’s entire enterprise and,ultimately, resulted in the implementation of a number of operational and strategic initiatives aimed at maximizing supply chain and production efficiencies and eliminating unused capacities to increase cash flow and reduce costs.
Stallion also has effectuated significant changes to its workforce over the last year to deal with the depressed industry environment. Since October 2008, Stallion has initiated workforce reductions on all levels. As a result, Stallion’s current workforce is approximately 40% smaller than its fourth quarter 2008 levels. Stallion also has taken additional employee-related measures, including reducing its discretionary spending allowance to curtail its capital, operational, and SG&A expenditures, scaling back certain workforce benefits previously provided, such as suspension of its 401(k) matching program, and reducing certain workers compensation and property/casualty insurance costs by nearly 40% within the last year.
Experts predict a recovery could begin to occur as soon as the fourth quarter of 2009 and could last through 2010. Early in 2009, analysts were estimating a significant further decline in rig counts through the third quarter of 2009. However, actual rig counts have been increasing slightly since June 2009, indicating the market has somewhat stabilized, in the short term.
U.S. drilling permit data, which traditionally has served as an accurate two-month leading indicator of rig count fluctuations, supports this current trend where rig count levels should remain stable, albeit at significantly reduced levels from the fourth quarter of 2008. Though permits have substantially declined, the level of permit use appears to have stabilized similar to rig count.
Initially, Stallion believed that an operational restructuring, alone, could suffice to capitalize on the predicted industry recovery. Despite Stallion’s successful operational restructuring efforts over the past year, Stallion since has realized that a corresponding balance sheet restructuring is also necessary.
Over the course of the last six months Stallion has been engaged in extensive discussions with the Lenders and Holders of the Stallion Equity Interests regarding the terms of a consensual out-of-court or prearranged restructuring. Notwithstanding its best efforts, however, Stallion was unable to obtain sufficient support to effectuate an out-of-court restructuring. As a result, Stallion shifted its efforts towards accomplishing the reorganization through a consensual chapter 11 plan.
Stallion Defaults Under the Debt Instruments
As Stallion continued to engage in discussions with the Lenders, the depressed state of the oil and natural gas industry caused Stallion’s financial performance to continue to deteriorate. Stallion’s deteriorating financial performance impaired its ability to comply with certain financial covenants in the Senior Secured Credit Agreement and the Bridge Loan Agreement and, ultimately, Stallion defaulted under certain covenants in the Debt Instruments.