JONE - Jones Energy

[JRM]

This is fairly speculative idea.  Jones is a small E&P company based out of Texas.  The were a spin-off and were saddled with a lot of debt in the face of falling commodity prices. 

 

This became interesting yesterday when a 13D was filed yesterday where an investor took an effective 9% position in the company.  They appear to be interested in pressuring the company to divest assets or sell the entire company.  They state in their letter than 50% of the equity is held by only 4 entities, so I would think a proxy fight could be relatively easy.

 

I'm still trying to quantify the downside if Jones' breaches its debt covenants and is forced into a restructuring.  The piece I don't understand is why would a larger company buy assets from Jones now (unless its at a discount) when they could just wait for Jones to file for bankruptcy.

 

I guess Q investments thinks Jones has enough time to sell off enough assets to fix the balance sheet.

[JRM]

Nobody is interested in this one, so its either a really good idea or a really shitty one.  Looking at this a little bit more I thought it was worth a small position.  It looks like an asymmetric risk/reward to me. 

 

They still have a decent hedge book in place, and should be able to meet debt covenants for the next 12-18 months.  They are heavily leveraged at this point (~7:1 debt to equity), and their profitability and asset values are levered heavily to the price of oil and natural gas. 

 

I normally hate these type of situations, but Jones seems like a mix between a special situation and a turnaround.  A previously large owner, Metalmark Capital, is in the long process of dumping its ~30% equity stake on the market.  It has taken weeks and will likely continue for weeks to come.  Previously JONE traded as a levered bet on oil prices and move up and down accordingly.  This trend was broken when Metalmark began selling and has artificially depressed the price while oil prices have been recovering.  It would be nice to know why they are selling.  People sell for many reasons, but only buy for one reason.  Perhaps they are forced sellers meeting investor redemptions in what has been a bad value investing market for many.

 

The downside is forced liquidation through bankruptcy in which case I think this is not a total loss in a fire sale.  The wells and land are prime location and should catch a bid.  They report using the successful efforts method, only capitalizing costs on locations where reserves have been found.  I think conservative accounting understates the NAV and overstates operating expenses; and the hedge book buys them time to maneuver.

 

There are two upside scenarios.  One its that a proxy fight ensues and new BOD representation will push for: (1) formation of a DrillCo, (2) the company being sold off in parts, or (3) selling the entire company. 

 

The other scenario is that this proxy fight does not play out and oil prices continue to recover.  Management continues their current play book.  This would obviously be the best scenario, but its nice to know management still has time and room to maneuver if oil prices don't maintain the recent trend.

[mrholty]

Thanks for the update.  Your original post put it on my watchlist but I have not gotten to it.  I'll try this weekend.

 

****EDIT***

Looking at it quickly - its losing more money than I would like and I fear that even with an activist it will be hard to turn the ship.  I'm risk averse and will pass on the equity but the bonds may be more for people.

 

CUSIP of 48019TAB0.  last trade of 78 which puts a yield of 13.5%. 

[JRM]

The income is definitely a mess right now.  There are a lot of restructuring charges this year due to shifting its asset base.  Its definitely not very easy to see what the income statement will look like when (and if) the smoke clears.  I'm focusing more on the balance sheet at this point.

[JRM]

Jones amends credit facility and covenant requirements to avoid a technical default: http://crweworld.com/article/news-provided-by-globenewswire/183623/jones-energy-inc-announces-the-successful-redetermination-of-its-borrowing-base-and-credit-facility-amendment-to-improve-financial-flexibility

 

...and announces it is exploring strategic alternatives: http://crweworld.com/article/news-provided-by-globenewswire/183626/jones-energy-inc-announces-it-is-evaluating-strategic-and-financing-alternatives

 

Metalmark still has a lot of shares to unload, though.