Description
Ultra Petroleum (UPLMQ) is a good short candidate as the company has already filed Chapter 11 Bankruptcy and equity holders are likely to get wiped out. However, since filing for bankruptcy on April 29th, the stock has more than doubled and currently has a market capitalization of $125M. The June 13th final hearing will likely declare the common stock worthless, and may be a catalyst for the stock to trade back towards its eventual price of $0.00.
Ultra Petroleum is a publicly-traded E&P company whose assets are comprised primarily of natural gas. Below is a map of the locations of their fields.
Source: First Day Motions
http://dm.epiq11.com/UPT/Document/GetDocument/2800185
The vast majority of their production is from WY as the chart below shows.
Source: Debtwire and First Day Motions
http://www.debtwire.com/info/wp-content/uploads/2016/05/Ultra-Petroleum-Slideshow.pdf
http://dm.epiq11.com/UPT/Document/GetDocument/2800185
Based on their proven reserves report at the end of 2015 the present value of their assets are $1.9B.
Source: Reserve Report Summary
https://www.sec.gov/Archives/edgar/data/1022646/000119312516484243/d127875dex991.htm
The debt of Ultra Petroleum is unsecured. Of this $2.5B are at the Opco level and are essentially senior to the $1.3B in HoldCo debt.
Source: Debtwire
http://www.debtwire.com/info/wp-content/uploads/2016/05/Ultra-Petroleum-Slideshow.pdf
Here is a diagram of the company structure for Ultra Petroleum.
Source: Ultra Petroleum First Day Motions
http://dm.epiq11.com/UPT/Document/GetDocument/2800185
Natural gas prices have steadily fallen over the past few years.
Source: Bloomberg
As commodity prices fell, the company took actions in 2014 and 2015 to improve its liquidity profile. However, as natural gas prices continued to fall it became clear that a restructuring of the capital structure might be necessary. In October 2015, the company began negotiations for an out-of-court restructuring. At the end of 2015, nothing came of these discussions even as the company’s financial situation continue to deteriorate.
In early 2016, the company proposed a comprehensive restructuring of the debt and in response the Ultra Resources Noteholders engaged a financial advisor to help evaluate the offer. By February 2016, the focus then shifted to negotiating forbearance agreements to address the near term interest and maturity payments. These agreements would give the company the time to attempt to negotiate an out-of-court restructuring. Thus $102M in principal and interest payments due March 1 were postponed. On April 1, they deferred an interest payment of $26M for the 6.125% Senior Notes due 2024 triggering the 30 day grace period. Realizing that they would not be able to complete an out-of-court restructuring by the end of the grace period, the company filed for Chapter 11 bankruptcy on April 29th.
In their filings they noted that they had $217M in cash available at the time of the filing. However, this was down substantially from the $282M they had on their balance sheet at the end of the 1Q. This means they managed to burn $65M in under a month, and this is while they were skipping interest and principal payments on their debt. We do not know the details of what caused this level of cash burn.
On June 13th, the court will have its final hearing on the declaration of worthlessness with respect to the common stock. We believe this could be a catalyst for the equity to correct from its recent run. With $3.5B in face value of debt, $217M in cash and proven resource value of $1.9B the equity is worthless.
As noted in their filings with the bankruptcy court, their projected EBITDA for 2016 is approximately $300M.
Despite the record production noted above, the Debtors’ consolidated EBITDA for 2015 was only $610.0 million, nearly 25% lower than the Debtors’ reported 2014 EBITDA of $810.0 million (and over 35% lower than the Debtors’ 2014 pro forma EBITDA of $950.0 million, including the full-year effects of the SWEPI LP acquisition). Moreover, although the Debtors expect to produce up to 280.0 Bcfe of natural gas and oil this year (nearly equaling last year’s record production), based on the commodity prices of a few months ago, the Debtors expected to generate less than $300.0 million of EBITDA in 2016, which is less than half the EBITDA that the Debtors generated in 2015, and less than one-third of their pro forma 2014 EBITDA. If the oil and natural gas markets can maintain the somewhat higher prices of recent weeks, the Debtors may generate more than $300.0 million of EBITDA in 2016.
Source: CFO Declarations - First Day Motions
http://dm.epiq11.com/UPT/Document/GetDocument/2800185
Thus even using a generous 7.4x forward multiple and assuming they can get to $500M in EBITDA, there still would not be any residual value left to the common stock.
Source: Debtwire
The only reason for the equity to have any actual residual value is if the debtholders wanted to move along the bankruptcy process faster and thus give a small payout to stockholders. However, what is unique in this situation is that there is no secured debt and it appears to be a free-for-all in Chapter 11. Thus without any one party in control of the process it seems unlikely that anyone will be willing to give up any economics to the equity holders.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
The June 13th final hearing will likely declare the common stock worthless, and may be a catalyst for the stock to trade back towards its eventual price of $0.00.