HighPoint Resources: At Significant Risk Of Restructuring (NYSE:HPR)

There is some risk that HighPoint Resources (HPR) doesn’t make the $12.25 million interest payment due October 15 on its 7.0% unsecured bonds due October 2022. HighPoint has the ability to make that interest payment if it decides to. However, it does have an excessive amount of debt, and we have seen a number of oil and gas companies file for bankruptcy in 2020 when faced with debt maturities within a couple years and no clear path to being able to deal with those maturities.

In HighPoint’s case, if it decided to avoid restructuring until July 2022, it would pay out another $97 million in bond interest payments, which would make a significant difference to its credit facility situation.

Distressed Bonds

HighPoint’s unsecured bonds are currently trading around 23 to 24 cents on the dollar. This is a level that indicates that the bonds are significantly impaired. If the company restructures, it should not be a surprise given where the bonds are trading. Its total debt is currently over 5.0x its projected unhedged EBITDAX using high-$40s WTI oil, which is far too high to be sustainable.

In the event of restructuring, HighPoint’s current common shares would likely end up with warrants or a small percentage (such as 3%) of new equity.

(Source)

In that scenario, the company’s unsecured bonds would be converted into around 97-100% of its new equity.

Credit Facility Debt

HighPoint had $175 million in credit facility debt at the end of Q2 2020. It also had a $46 million working capital deficit (excluding derivatives). The company may be able to generate $40+ million in positive cash flow in Q3 2020 with the benefit of its hedges and a limited $10 million capex budget. Its bond interest payments are in Q2 and Q4.

The positive Q3 2020 cash flow would reduce the company’s credit facility debt to around $135 million (or $181 million including its working capital deficit).

(Source: HighPoint’s Q2 2020 10-Q)

If HighPoint skipped its October bond interest payment and restructured, while also monetizing its hedges, it could potentially reduce its credit facility debt to around $55 million (not including its working capital deficit or restructuring costs). This would leave it with a healthy balance sheet going forward. The company’s estimated unhedged breakeven point would be high-$40s WTI oil if it relieves itself of the $49 million in annual bond interest payments.

Colorado Setbacks

One thing to note is that Colorado may end up implementing 2,000-foot well setbacks, with a final vote expected in November. HighPoint’s acreage in Colorado is located in rural areas of Weld County though, so the impact to it will be pretty limited. Bonanza Creek mentioned that the increased 2,000-foot setbacks would affect less than 5% of its acreage. HighPoint probably won’t be affected too much more than that.

Conclusion

HighPoint does have the ability to avoid bankruptcy for some time if it chooses to, with the company having a decent amount of room under its credit facility and the ability to pay down its credit facility further with the help of hedges.

However, its current debt level is unsustainable, at over 5.0x unhedged EBITDAX with high-$40s WTI oil. The company’s credit facility maturity also potentially springs forward to July 2022 if it hasn’t reduced its 2022 notes to $100 million or less by then.

The challenges the company faces in dealing with those notes means that it would not be surprising if HighPoint Resources filed for bankruptcy soon, giving it the ability to exit bankruptcy with a modest amount of credit facility debt.

In the event of restructuring, HighPoint’s unsecured noteholders would likely end up with all or nearly all of its new equity. The company’s current shares would be worth approximately 2 cents per share if current shareholders received 3% of its new equity.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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