Earlier this month, C&J Energy Services Ltd. (OTCMKTS:CJESQ) issued an updated corporate presentation on its website. In this presentation, the company focused on its overall performance, near term outlook, cost control and efficiency initiatives and provided an operational services overview.
C&J Energy is entering a Chapter 11 Bankruptcy to restructure and as per the update, the existing common shareholders will be awarded warrants. The restructuring considers that substantially all of the firm’s debt of $1.4 billion will be turned into equity. Funds worth $200 million is planned to be raised via a rights offering and debtor-in-possession financing worth $100 million is planned to be made available via senior secured term loan plan. An additional loan amount of $100 million will be raised upon exit of the bankruptcy plan.
As per the disclosed terms, the current common shareholders’ securities will be extinguished. In addition, the equity rights to generate $200 million are rights to be released pro rata to the debt holders, and not to existing common shareholders. Depending on approval, current common shareholders will obtain warrants for up to 6% of the restructured firm. The warrants term is 7 years while the strike price is known at $1.55 billion market cap.
It should be noted that Standard & Poors had assigned a ‘D’ rating on C&J Energy’ debt with debt recovery projected at the higher range point of 50%-70%. This implies that the total worth of the firm, once re-structured, would be around 65% of the debt converted, plus the existing market cap and also the $200 million raised from the rights offering. Considered all points, the best estimate for a post-reorganization market capitalization of company is around $1.2 billion.
Since the existing common shares will probably be just exchanged for warrants, the value of those warrants amount to around $60 million in total worth of C&J. The current value of the warrants seems to be nearly 15% less than essentially purchasing the same stake in the firm’s share once the reorganization is done. C&J Energy stock currently seems overvalued depending on the current details available.