OREANDA-NEWS. Samson Resources is the latest in the parade of leveraged exploration and production (E&P) companies unable to overcome challenges from the weak natural gas and oil pricing without restructuring, according to Fitch Ratings. Last night's bankruptcy filing is aimed at reducing net debt that totaled approximately $4 billion at March 31. The capital structure became unsustainable relative to cash flows in the face of the significant drop in commodity prices.

Samson's filing drives Fitch's trailing 12-month (TTM) high-yield bond default rate for the energy sector to nearly 5% and the E&P subsector to 8.5%, assuming no additional defaults this month. The bankruptcy comes on the heels of Hercules Offshore's filing ($1.2 billion of outstanding bonds) on August 13. There have been six energy defaults in the past six weeks, including second distressed debt exchanges for SandRidge Energy and Halcon Resources. The total TTM E&P sector default volume was $10.4 billion, more than the annual amount tallied during each of the past five years, according to Fitch Ratings High Yield Default Index.

The pre-arranged bankruptcy filing was the next step in Samson's restructuring after gaining support for a proposed restructuring plan from more than 68% of second lien lenders. The plan contemplates a debt-to-equity conversion of the second lien loan.

The restructuring would significantly deleverage Samson's balance sheet and provide the company with at least $450 million of new capital. Rights offerings will be made to existing second lien lenders and backstop parties to raise $125 million of new second lien debt and $350 million of new common stock. The second lien lenders and backstop parties will gain control of the new common equity. The $1 billion second lien loan was trading at $0.275 on the dollar as of Wednesday, Sept. 16, which provides an indicator of rough recovery value.

The disclosure statement indicates an estimated mid-point enterprise value of $1.3 billion. First lien asset-based lender (ABL) claims estimated at $942 million would receive 100% recovery under the proposed plan in a combination of cash and a new exit ABL facility of up to $750 million (with an initial borrowing base of $650 million).

Recovery on the $2.25 billion of unsecured bonds at the bottom of the capital stack would be considerably worse than the second lien debt. Unsecured debtholders and other unsecured claims would receive 1% of the new common stock in distributions if they vote to accept the plan, essentially wiping out their investment. The unsecured bonds were bid at $0.00375 on the dollar on Wednesday, indicating that poor unsecured debt recovery was widely expected in the high-yield market.

Samson is a fracking company that primarily produces natural gas plus some oil. The balance sheet became leveraged at the time of acquisition by a consortium of private equity investors led by KKR in 2011. Natural gas prices have been depressed for years as a result of strong shale gas production. The plunge in oil prices beginning in late 2014 compounded challenges. Management has been pursuing operational restructuring efforts including laying off 30% of the workforce, cutting capex and selling assets to improve negative cash flows while negotiating with creditors on the plan.