spartansaver Posted February 5, 2020 Share Posted February 5, 2020 Warrants to purchase Weatherford International in 4 years at a strike of $100 (Weatherford underlying priced at $28 - warrants priced at ~$0.85). Weatherford recently emerged from bankruptcy with a relatively clean balance sheet. The warrants were priced using a black scholes model during bankruptcy and are trading for less than half the value ascribed to them. Decent chance they expire worthless, but an above zero chance that Weatherford trades for a fair amount more than $100. Link to comment Share on other sites More sharing options...
petec Posted February 5, 2020 Share Posted February 5, 2020 Consensus (for what that is worth) has ebitda at around $700m going forward. You'd have to put it on 12x ebitda to get it over $100. Not impossible. Not likely. Out of interest how did you find this? I am (idly) looking for a list or database of warrants but haven't found one. Link to comment Share on other sites More sharing options...
spartansaver Posted February 5, 2020 Author Share Posted February 5, 2020 Consensus (for what that is worth) has ebitda at around $700m going forward. You'd have to put it on 12x ebitda to get it over $100. Not impossible. Not likely. Out of interest how did you find this? I am (idly) looking for a list or database of warrants but haven't found one. The company prior to bankruptcy seemed to think it could do over $1b in EBITDA. Cost cuts didn't happen fast enough. Maybe you get a rise in oil prices and they cut costs. 4 years is a long time. I screen for companies emerging from bankruptcy, read through the docket, and saw they were issuing a bunch of long term warrants. There is one decent database for warrants I've come across. http://canadianwarrants.com/american/home.html Link to comment Share on other sites More sharing options...
spartansaver Posted February 5, 2020 Author Share Posted February 5, 2020 Consensus (for what that is worth) has ebitda at around $700m going forward. You'd have to put it on 12x ebitda to get it over $100. Not impossible. Not likely. Out of interest how did you find this? I am (idly) looking for a list or database of warrants but haven't found one. The company prior to bankruptcy seemed to think it could do over $1b in EBITDA. Cost cuts didn't happen fast enough. Maybe you get a rise in oil prices and they cut costs. 4 years is a long time. I screen for companies emerging from bankruptcy, read through the docket, and saw they were issuing a bunch of long term warrants. There is one decent database for warrants I've come across. http://canadianwarrants.com/american/home.html To add a bit more, the company's bankruptcy projections guided towards $1B in EBITDA in 2021. From my small understanding of bankruptcies, the valuation section in this case may be conservative because the more senior holders were largely in control and wanted as much as possible (lower estimates, less for equity - equity in this case was essentially eliminated). I certainly agree that $100 is not easy to reach, but the warrants are getting priced like it's nearly impossible. Link to comment Share on other sites More sharing options...
writser Posted February 5, 2020 Share Posted February 5, 2020 I certainly agree that $100 is not easy to reach, but the warrants are getting priced like it's nearly impossible. How do you value them? If I plug them in a simple B&S model with vol 25 I arrive at a price of $0.06. Market seems to price in a vol closer to 40, which might be correct but I wouldn't call that cheap. Are the warrants adjusted for any possible dividends? Link to comment Share on other sites More sharing options...
spartansaver Posted February 5, 2020 Author Share Posted February 5, 2020 I certainly agree that $100 is not easy to reach, but the warrants are getting priced like it's nearly impossible. How do you value them? If I plug them in a simple B&S model with vol 25 I arrive at a price of $0.06. Market seems to price in a vol closer to 40, which might be correct but I wouldn't call that cheap. Are the warrants adjusted for any possible dividends? I played around with ranges of what Weatherford could be worth and the respective probabilities and felt that the risk/reward seemed adequate. I've also been debating buying Weatherford outright. I didn't put much effort into black-scholes (below is from bankruptcy materials). "The value of the New Warrants has been estimated using a Black-Scholes valuation model and reflecting the estimated range of Reorganized Weatherford’s equity value above. Based on that analysis, the value of the New Warrants is estimated at $3.8 million to $38.9 million, with a midpoint of $15.5 million." There are 7mn warrants outstanding at a price of $0.85 implies total value of $6mn. Link to comment Share on other sites More sharing options...
Spekulatius Posted February 6, 2020 Share Posted February 6, 2020 I am more interested in the stock than the warrants. Where can I find the current financials? I guess the filing is here, but it doesn’t contain current financials. It’s just details how everyone else, but shareholders get paid : https://www.sec.gov/Archives/edgar/data/1603923/000110465919073841/0001104659-19-073841-index.htm Link to comment Share on other sites More sharing options...
spartansaver Posted February 6, 2020 Author Share Posted February 6, 2020 I am more interested in the stock than the warrants. Where can I find the current financials? I guess the filing is here, but it doesn’t contain current financials. It’s just details how everyone else, but shareholders get paid : https://www.sec.gov/Archives/edgar/data/1603923/000110465919073841/0001104659-19-073841-index.htm The Disclosure Statement has most of the useful info. Starting on p. 318 you get financial projections and capital structure. The company has about $2.7b in debt and $1.4b in cash. 70mn shares outstanding and 7mn in warrants. https://cases.primeclerk.com/weatherford/Home-DocketInfo?DocAttribute=4658&DocAttrName=CLASS10SOLICITATIONMATERIALS Link to comment Share on other sites More sharing options...
Spekulatius Posted February 6, 2020 Share Posted February 6, 2020 I am more interested in the stock than the warrants. Where can I find the current financials? I guess the filing is here, but it doesn’t contain current financials. It’s just details how everyone else, but shareholders get paid : https://www.sec.gov/Archives/edgar/data/1603923/000110465919073841/0001104659-19-073841-index.htm The Disclosure Statement has most of the useful info. Starting on p. 318 you get financial projections and capital structure. The company has about $2.7b in debt and $1.4b in cash. 70mn shares outstanding and 7mn in warrants. https://cases.primeclerk.com/weatherford/Home-DocketInfo?DocAttribute=4658&DocAttrName=CLASS10SOLICITATIONMATERIALS Thanks. looks like the EV is about $4.06B (70M shares x $28 + $2.5B debt - $400M Cash). Note that the projections are from July 2919 and pretty stale. It’s does sound reasonably cheap for $900M in EBITDA also I have noticed in other bankruptcy dockets that these projects tend to be a bit on the optimistic side and additional costs become due once the company becomes public again. Link to comment Share on other sites More sharing options...
SharperDingaan Posted February 6, 2020 Share Posted February 6, 2020 You might want to consider the possibility that Weatherford comes out materially smaller than it is now, and with very different assets. Creditors will be swapping debt for equity, and doing the deals with potential partners - not Weatherford. Weatherford itself will be little more than the stub of residual assets that were not wanted, and carrying the maximum debt possible. SD Link to comment Share on other sites More sharing options...
Foreign Tuffett Posted February 6, 2020 Share Posted February 6, 2020 I am seeing closer to $400M adj EBITDA through the first nine months of 2019 https://weatherford.gcs-web.com/static-files/a4e9060b-7a8a-4662-80f0-bd6f3e8c2832 70M shares x $28 = ~$2B market cap $2.1B 11% (ouch!) Senior Notes due 2024 $400M or $500M Cash (per the December press release: $900 million in liquidity - $450 million undrawn revolving credit facility) = ~$3.6B EV + however you want to value the warrant overhang https://www.weatherford.com/en/investor-relations/investor-news-and-events/investor-news/investor-news-article/?ItemID=611 https://weatherford.gcs-web.com/static-files/08a36950-cd65-461e-95a8-93d9aa0f6908 I don't know how Morningstar is getting to a $3B EV #. https://www.morningstar.com/articles/962052/weatherfords-out-of-bankruptcy-and-undervalued Link to comment Share on other sites More sharing options...
Gregmal Posted February 6, 2020 Share Posted February 6, 2020 Two general rules of thumb with these. 1) that a company emerging from bankruptcy probably didn't get there because business was great and they were hitting all their targets. As someone already mentioned, the metrics used in court are often worth taking as seriously as one takes post combination SPAC projections. 2) warrants, rights, CVRs, etc, can have some value, but more often than not they are used because one party rather keep their cash. Except of course when the government issues them, ala TARP, but those dont come around often. Link to comment Share on other sites More sharing options...
5xEBITDA Posted February 6, 2020 Share Posted February 6, 2020 The reorg equity market is trash right now...wouldn't really go barreling into Weatherford, there's better distressed OFS risk out there. Link to comment Share on other sites More sharing options...
bizaro86 Posted February 6, 2020 Share Posted February 6, 2020 The reorg equity market is trash right now...wouldn't really go barreling into Weatherford, there's better distressed OFS risk out there. I'd be very interested if you had any names you'd be willing to share that you think are promising. Link to comment Share on other sites More sharing options...
5xEBITDA Posted February 6, 2020 Share Posted February 6, 2020 The reorg equity market is trash right now...wouldn't really go barreling into Weatherford, there's better distressed OFS risk out there. I'd be very interested if you had any names you'd be willing to share that you think are promising. I like Superior Energy Services (SPN) in the space. They are the #1 provider of drill pipe rentals to the sector - Weatherford is a distant #2 and not investing into the business. Pipe rentals is generally a good business with < 6 month pay back period and Superior has invested in connector technology that others haven't which provides them with a degree of pricing / staying power. At current oil prices, operators don't have the budget to invest in the growth capex to catch up to Superior in terms of pipe inventory at the moment. Superior is merging their non-rental businesses (hydraulic work over, pressure control, cementing, completion, plug & abandonment, etc) into a new business called Forbes Energy Services. This de-risks the product portfolio, the businesses I mentioned are those getting hit hardest right now in OFS. Superior is in the process of completing an exchange offer for their 2021 bonds leaving the residual stub well covered by cash on the balance sheet and pushing out their maturity wall to 2024. The Company will still generate around ~$20 million free cash flow on an adjusted EBITDA base of $169 million (pro-forma for businesses going to Forbes) and have net leverage of 3.7x. While I like owning the bonds of the Company, the stock should see strong levered returns given it is an $80 million stub under $622 million net debt. Link to comment Share on other sites More sharing options...
Spekulatius Posted February 6, 2020 Share Posted February 6, 2020 Sounds like SPN is trading at about 5 x EBITDA ;D. Thanks for the idea! Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now