Monday, June 15, 2015

Sabine on the Clock

Sabine Oil and Gas announced this morning that it will not be making a $21 million interest payment due today on its 2019 senior notes.  The company exercised its rights to a grace period that gives it another 30 days to make the payment before the loan goes into default.  Sabine was already on the clock with most of its debt holders, as it had negotiated a forbearance agreement with is revolver and its second lien facility, but the clock is ticking even louder now.

Sabine says it still has $276.9 million in cash and is able to fund its operations and pay its suppliers and trade creditors, but I'm sure trade terms are tightening and knuckles are getting whiter by the day.


Kw said...

Hey robert I really appreciate and enjoy your website. As a Sabine royalty owner how can bankruptcy impact our royalty payments? Thanks for everything

Robert Hutchinson said...

Sabine still has a lot of money in the bank at this point to operate. The bankruptcy (if it happens) is really more about the long-term viability of the company in a low commodity price environment. When a company goes bankrupt, it usually secures new financing called DIP financing (debtor in possession), which allows it to continue to operate. Sabine's problem is not that it was poorly run but that it has too much debt following the merger with Forest (although both companies likely would be in the same boat now anyway).

I'm not a lawyer, but royalties should be paid off the top. The operator shouldn't be able to pocket the royalty money to pay off their other creditors. You should prime them. The greater concern would be if the company's administrative side is gutted and is unable to competently administer its operations. Good luck getting someone to follow up a complaint at that point! (or answer the phone)

The good news is that the value of the company is the assets it holds, namely the leases and the operating wells. If Sabine fails, either the lender will step in or the assets will be sold to someone who is more stable. It might be a volatile period, though.