Rosehill's Thorns
“We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses” – Abraham Lincoln
Clean-up Items:
Complete PDF Report & Backup Files:
Rosehill Filing Links:
ROSEHILL BACKGROUND.
When a company files a Notice of Late Filing (for a 10K or 10Q), it usually means one-of-two things:
The auditor is incompetent
Management is incompetent
Rosehill had one, two, three - count ‘em - FOUR Notices of Late Filing (NT).
**In 17 at-bats**
A .235 batting average…
We’re giving the auditors a pass -
PREPACKAGED CH.11.
Time & time again, E&P mergers (or “consolidation”) are naively or disingenuously proposed by industry participants as a one-word solution.
For all but a few Shale E&Ps, you can’t consolidate / merge w/o taking out the lenders…
…and the lenders are - generally - owed more than the assets are worth.
Hence, bankruptcy.
The process that Rosehill underwent - leading up to its Ch.11 filing - might as well be considered standard:
“In Jan ’20 Rosehill submitted a merger proposal to a strategic counterparty. In Feb ‘20, Rosehill received two merger proposals from strategic merger parties…
…however, all proposals required varying levels of equitizing Rosehill’s capital structure in order for any merger transaction to be possible…
…As part of ongoing merger discussions… the RRI Board directed Jefferies to begin negotiations with the key stakeholders at both RRI & ROC to negotiate a global restructuring of Rosehill’s capital structure…
…The Debtors & their advisors were not ultimately able to complete an out-of-court restructuring transaction” - pg 28, Docket 18
Summarized:
Try to sell / merge
Identify that the MV for the assets < Debt
Try a Liability MGMT transaction
File for Ch.11 - prepacked plan, emerging w/ a right-sized capital structure
Assuming you have one (rational) lender, that’s how it works.
If there’s more than one lender…
The theoretical optimal outcome will not be achieved.
The sub-optimal madness of individual - conflicting - incentives ensues:
Classic Distressed Debt Game Theoretical Strategies
Conflicts of Agency w/ Management
Conflicts of Agency w/ Advisors
Conflicts of Agency w/ Lenders
For brevity’s sake, we’re only discussing the agency of the lenders today.
Where the Rosehill situation diverges from reason is w/ the proposed exit capital structure:
Ignoring any junior / equity components, the proposed exit RBL initial borrowing base is 57% larger than our base scenario of Rosehill’s PV10.
This begs two questions:
How is this happening?; &
Why is this happening?
How:
For starters, the decline curves used to forecast PDP production are bogus (see pages 6-8 of the PDF).
Two bits of standard language describe the conviction (or lack thereof) of the forecasts:
“The production estimates are based on Management’s best efforts to forecast the decline curves for their existing PDP wells. The actual production from existing wells could vary considerably from the assumptions used to prepare the production forecast contained herein” - pg 306, Docket 18
&
“In preparing the estimates set forth below, Jefferies has relied upon the accuracy, completeness and fairness of financial & other information by the debtors” - pg 310, Docket 18
Why:
We suspect that the senior lenders don’t want to realize the loses, today.
By filing, they’ve cleaned up the capital structure, so that - should they want to force an asset sale the assets in the future - they’ll have an easier time doing it.
Because unless oil prices go up (or they find a sucker), these assets won’t pay back the RBL -
From ShaleProfile, message Enno & start a trial
THE ROCK KILLED ROSEHILL.
What killed Rosehill?
Choose One:
The OPEC+ price war
COVID
The 2019 drilling campaign
If you answered (#3), then you’ve been looking at RRC data.
Rosehill’s 2019 drilling campaign was disastrous…
AND it was disclosed as a gamble to begin with:
“…in connection with the White Wolf Acquisition, we acquired approximately 6,505 net acres in northwestern Pecos County, Texas, which is largely unproven and relatively undrilled compared to other areas in the Delaware Basin. We have no experience drilling in Pecos County” - Rosehill 2018 10K
Pecos County Well Performance:
Those Pecos County wells have under-performed significantly, relative to both Rosehill’s other wells & peers in Pecos County.
Loving County Well Performance:
From ShaleProfile, message Enno & start a trial
CONCLUSION.
We believe ROSE’s PDP to be worth < the RBL, in the current plan to exit Chapter 11.
Theoretically, this shouldn’t happen.
It probably makes the most economic sense to sell the assets today.
But, that’s not happening.
The incentives in place (both management & the lender’s) are resulting in an amend-&-extend-type situation.
Kicking the can down the road.
And - since these incentives are not unique - cases like this should be expected w/ future Shale Ch.11s.
Their base case scenario is to hope for higher prices.
However…
**Hope is not an underwriting strategy**
On a related note - we have no idea what EIG is thinking.
In fairness to them, it wasn’t clear that the 2019 drilling program failure coming.
As to why anyone is still playing with these assets…
Feels like everyone at the Rosehill table is on tilt -
That’s it for this week - we’ll be back on Tuesday - the NBA & NHL return this weekend - also this weekend: FA Cup Final & Championship playoff - buckle up -
Brilliant work, one addition to your last point. EIG and ROSE aren't playing poker but blackjack, the lawyers and Jefferies are the house, and have been over-serving the table for years; now that everyone is too drunk to count cards, the house has gotten back all its chips (sadly, OPM).