Bottom-fishing for Colorado's Oily Carp
I know this story. Have checked it out from the ground up, more than once... but haven't looked at it since long before the events of March last year. In my prior looks at it... I always decided, yeah, it makes sense to do it... but...
Having it make sense, and getting it done... are very different things. Now, some years later, it still makes sense, and it still leaves me thinking my prior decisions were spot on... for the situation that existed then. But, today... it seems it is finally well on the way to getting done. So, does that make it time to participate ?
What I'm talking about is the years in the making, now "in process" merger between HighPoint Resources Corporation (HPR) and Bonanza Creek Energy, Inc. (BCEI)
Others (March 10,2021) are saying "time to leap in" buying...
HighPoint Resources Corp. HPR
Denver, Colorado-based HighPoint Resources Corporation is an exploration and production company. It focuses on the development of oil and natural gas assets primarily in the Denver-Julesburg Basin of Colorado. Zacks #2 ranked Highpoint is on the verge of a merger with Bonanza Creek that will create a company with significant assets (206,000 net acres) and scale (50,000 Boe/d, 53% oil) in the rural DJ basin. Moreover, the complementary assets will result in significant synergies and generate strong cash flow for the combined entity. The Oil & GAS E&P industry to which the company belongs is in the top 32% of Zacks-classified industries. Current estimates point to 288.9% EPS growth in 2021 followed by 7.5% growth in 2022 (ending December). Revenue, which will play a part in this, is currently expected to grow 20.6% this year and 6.6% in the next. Since the stock is trading at 20.3% of its 52-week range with a P/E of just 0.69X, it makes sense to snap it up.
My reply, not a surprise to the regulars: Wait for it. That the merger makes sense... doesn't mean you should fail to pay close attention to what makes most sense to you... in choosing how and when to participate.
A first issue found in that analysis is in evaluating a merger like this as if it is HPR buying a simple addition to their portfolio... making the math in higher future revenues linear in meaning to a buyer of HPR now. That doesn't work... because it ignores the other company's role and relationship in the deal... and what happens to your interest in the process of melding of one set of maths into another. For shareholders, there's a lot of math that matters between here and future revenues... including... if you buy a share now to participate in those future revenues... what share of them are you buying ?
HPR's market cap $44 million, enterprise value $785 million... $774 million in debt, only $11M in difference ?
BCEI's market cap $699 million, enterprise value $704 million... $30 million in debt.
When merged, HPR shareholders get only 30% of the merged company... but, the bigger problem is that before you get to that point... HPR has to get rid of the debt first. The majority of lenders are cooperative, but that means that a pre-merger dilution will occur. The math is easy enough if you use the above numbers... shareholders equity in HPR is 5.6% and debt is 94.4% of the value... about an 18 for 1 reverse in the first round of dilution... unless the value in equity is overstated, as the numbers suggest is true.
HPR has 4.31 million shares. Float 2.2 million. Shorts are 16.85% and 31.65% of the shares.
BCEI has 20.84 million shares Float 20.67 million. Shorts are 11.51% of the outstanding/float.
If HPR gets 30% (need to validate that)... and you keep existing holders at 1:1... you'd need 77 million HPR shares... out of 256 million total post merger BCEI shares... Around an 8 for 1 split for BCEI holders if some debt is assumed. Otherwise, HPR shares will get reversed... to as much as an 8 for 1 to sustain BCEI share count parity ? The current share price differential is about 7:1 so that makes sense...
Lots of "ifs" there... the math just a "for instance" to highlight the least possible dilution risk... and I doubt that's the capital structure they'll want coming out of the deal... so. also, be aware more change after the deal is done could happen, if that's necessary...
But, while both sides shareholders approved the deal, HPR didn't get the votes they needed from debt holders, so they declared bankruptcy to get a judge to approve the "pre-packaged" deal without their votes... which just happened:
HighPoint Resources Announces Prepackaged Plan Confirmed By Court
.
The rest of what that means about the deal that is being done is clear as mud, still... all the article says is:
"HighPoint and Bonanza Creek will announce within a few days the expected timing of their closing. Additional information regarding the Prepackaged Plan, including Court filings, is available at dm.epiq11.com
I haven't read the details yet... and can't make an informed call on if, or what to buy, or when. until I have...
Charts show HPR shares have lost 1/2 of their value from the lows of March 2020 crash... while BCEI has gained about 1/3 from its pre-crash prices... up 3X from the lows... although both are now in fairly steep declines with charts (and short positions) not leaving a lot of doubt about "lower"...
The timing hasn't been announced... but, market events aren't going to wait for them...
However, I am going to "WAIT FOR IT"... I think neither one is a buy now, and neither will be until the charts say that it is... and say it convincingly... realistically... probably not until, and perhaps not for some time after, the deal is consummated... and we see what market conditions in the rest of the market look like...
But the bottom line is the "New Co" will have $218M (BCEI)+ $250M (HPR) in revenues = $468M
EBITDA of $263 (HPR) + $195 (BCEI) = should not be more than the revenues...
And maybe $100 million in debt vs. $804 million now... $48 million in cash, $24 from each... unless some is used in paying down some recalcitrant debt...
What it's worth still depends on what happens next in the economy... the market... and in oil prices... and for that we're in a particularly useful patch of time to wait for it... |
