Chaparral Energy’s proposed unsecured notes offering, its first since emerging from bankruptcy in 2017, will give the E&P company much-needed liquidity to complete projected drilling projects and further improve asset quality under a more conservative and proactive management team, said four sources following the deal.

Led by JPMorgan, the B-/Caa1 rated USD 300 senior unsecured five year non-call two bond was launched Tuesday (19 June), with the roadshow ending Tuesday (26 June) and pricing expected thereafter. Whispers are circulating in the 7.75-8% range, three sources said.

Proceeds will pay down borrowings under Chaparral’s USD 400m revolving credit facility due 2022 and fund general corporate purposes.

The deal boosts Chaparral’s liquidity to USD 383m from USD 54.2m, adding to USD 98m in cash and USD 285 of revolver capacity. Pro forma the deal, total leverage ticks up by about half a turn to 2x, based on USD 148.3m LTM adjusted EBITDA as of 31 March and USD 300m in total debt, according to SEC filings.

Based on USD 110m-USD 120m in adjusted EBITDA, USD 250m-USD 300m in capex and around USD 25m of interest expense, sources estimated that Chaparral could potentially burn through more than USD 200m of cash each year through 2019—assuming a WTI price of USD 60 per barrel for 2018 and USD 55 per barrel for 2019. WTI was last quoted today at USD 68.54.

In terms of pricing, Chaparral should be wide of fellow oil and gas company Alta Mesa, which has more acreage and higher production, two buysiders said.

“They went through a similar period where they were not able to access the capital markets during the economic downturn,” said one of the buysiders, referring to Alta Mesa. “Since then, they’ve gone public and done fairly well.”

Alta Mesa’s USD 500m 7.875% senior unsecured notes traded today at 106.5 to yield 6.187%, according to MarketAxess.

‘A high-growth story’

The Oklahoma-based company has a promising investment thesis based on increased drilling and production, three buysiders said.

“Generally, it’s what is called a high-growth story. They had capital constraints for many years that prevented them from completing their planned drilling, but now the company is laser-focused on production and drilling,” said an analyst.

Chaparral plans to ramp up drilling activity through the end of 2019 in its STACK areas in Kingfisher, Canadian and Garfield counties in Oklahoma, according to SEC filings. The company expects a 10% increase in total production year-over-year and a 30% increase in STACK production.

In 2017, Chaparral entered into a JDA with a subsidiary of Bayou City Energy in which Bayou will fund the drilling, completion and equipping costs for 30 STACK wells with cost caps of USD 3.4m-4m per gross well, according to SEC filings. As of 31 March, the company has begun drilling 14 wells of which four are completed, with plans to begin drilling the remaining 16 wells by end of year.

Successful restructuring

In May 2016, not long after skipping a coupon for its USD 400m 8.25% senior unsecured notes due 2021, Chaparral filed for bankruptcy. The company emerged from bankruptcy on 22 March 2017.

As a part of its restructuring, Chaparral converted USD 1.2bn of pre-petition debt to equity and eliminated approximately USD 100m of annual interest expense.

Three buysiders noted that the company had benefitted from the restructuring and now shows potential.

“I think they did a great job in the restructuring. They exchanged all of the senior notes for new common stock,” a buysider said.

The company also hired new management, appeasing investors, the buysider continued.

“The chairman and CEO at the time of the bankruptcy were driving the leveraged balance sheet. The new CEO is running a real and conservative balance sheet, so there is hope for the company,” said the buysider.

Upon exiting bankruptcy, Chaparral’s capital structure included cash on hand as well as a reserve based lending facility with an initial borrowing base of USD 225m (which was subsequently increased to USD 285m) and a USD 150m term loan. At the time, Chaparral had over USD 100m of liquidity, according to a company announcement.

With a clean slate following the restructuring, the company’s main focus should now be to cautiously balance leverage with its capital spending plan, buysiders said.

“It’s energy, so it’s all about oil prices. As long as the debt is restructured, they don’t get too loaded, and oil prices are up, they should be fine, until the next drop in oil prices,” said one buysider.

Chaparral and JPM did not respond to requests for comment.

2018 Debtwire