Pioneer Energy Services Corp. – Court Approves Disclosure Statement with Revised Financial Projections to Reflect Coronavirus Impact

April 2, 2020 – The Court hearing the Pioneer Energy Services cases issued an order approving a Supplement to the Debtors’ Disclosure Statement, otherwise approved on March 2nd, that updates risk factors and financial projections to reflect the COVID-19 Pandemic [Docket No. 168]. The motion and order are interesting from both a bankruptcy practice perspective and to the extent that the financial projections update creditors (and the market) on the impact of the COVID-19 on the Debtors' present and anticipated operational performance. In this case, the Debtors stress that their prepackaged Plan is effectively unchanged and the considerably revised financial projections do not change treatment of any classes, although clearly projected recoveries for those receiving equity in the emerged Debtors would clearly have to be revised downwards.

The Debtors have not provided a redline of the revised financial projections against those filed at exhibit F to the Disclosure Statement at the beginning of March, but we have provided a snapshot as to the original and revised income statements below and the considerable expected impact of the pandemic on revenues, income and EBITDA.

The motion requesting approval of the amended Disclosure Statement [Docket no. 163] states: "In light of the coronavirus (COVID-19) outbreak and recent fluctuations in oil prices, the Debtors have updated (i) the Debtors’ projections to reflect, among other things, performance estimates under two future price and activity scenarios, and (ii) statements of risks.

The Supplemental Disclosure (a) does not amend any Plan provisions; (b) does not change the Plan’s proposed treatment of any class of creditors or interest holders; and (c) is based on events that have already been widely reported in the public domain.

The Debtors conferred with the U.S. Trustee, PNC Bank, National Association, as DIP Agent ('PNC'), the Consenting Prepetition Term Lenders, and the Consenting Noteholders in advance of the filing of this Motion. PNC, the Consenting Prepetition Term Lenders and the U.S. Trustee do not object to this Motion. The Consenting Noteholders and New Secured Bonds Commitment Parties (i) do not oppose conditional approval of the Supplemental Disclosure on the terms set forth in this Motion, (ii) do not consent to the Supplemental Disclosure for all purposes under the Restructuring Support Agreement, and (iii) have reserved all rights, claims, breaches and remedies with respect to the Supplemental Disclosure, final approval of the Disclosure Statement and confirmation of the Plan."

Financial Projection Income Statements

Original Projections (see Disclosure Statement, Exhibit F for notes)

Revised Projections (see Docket No. 163 for notes) 

The revised projections now include a Case A and a Case B using data from Factset and New  York  Mercantile Exchange, respectively. the Debtors state: "This Disclosure Statement Supplement contains updated Financial Projections for the Projection Period under two future price and activity scenarios given the heightened market uncertainty caused by, among other things, the recent coronavirus (COVID-19) outbreak and Saudi-Russian oil price dispute. The first scenario is based, in part, on recent estimated future oil prices that approximate forecasts from securities analysts for oil prices for years 2021 through 2024, as reported to Factset, a financial data services provider. The second scenario is based, in part, on recent estimated future oil prices that approximate oil futures contracts, as quoted by the New York Mercantile Exchange for the same periods. Expectations for future prices and activity remain volatile and are subject to further change."

Case A

Case B

Further Background

Plan Overview

The Disclosure Statement provides: "Taken as a whole, the Restructuring achieves:

•  a 100% recovery to Allowed General Unsecured Claims and all other creditors who are Unimpaired under the Prepackaged Plan; and
•  deleveraging the Company’s balance sheet by (i) equitizing approximately $300 million of prepetition Notes Claims with the consent of an overwhelming amount of the Notes Claims, and (ii) refinancing of $175 million of Prepetition Term Loan Claims with the proceeds of the New Secured Bonds and Rights Offering.

In addition, the Prepackaged Plan provides for a substantial capital infusion into the Company through a new money Rights Offering to raise up to $125 million through the issuance of the Rights Offering Convertible Bonds (the “Rights Offering Amount”) and Management Commitment Convertible Bonds.  

Lastly, the Company will seek to issue New Secured Bonds in the amount of $78.125 million consistent with the terms set forth in the New Secured Bond Term Sheet and otherwise to be determined. The proceeds of the New Secured Bonds will be used to refinance the Prepetition Term Loan Facility."

Restructuring Support Agreement

On February 28, 2020, the Debtors entered into a restructuring support agreement (the “RSA”) with (i) lenders holding over 99% in the aggregate amount outstanding under their prepetition term loan facility, and (ii) members of an Ad Hoc Noteholder Group holding approximately 75.9% in the aggregate of the principal amount outstanding under their 2022 6.125% senior unsecured notes.

The RSA envisions a balance sheet restructuring of the Company’s funded indebtedness and an infusion of up to $125 million in new money through a partially backstopped rights offering and management commitment. Key terms include (see Exhibit B to Disclosure Statement for RSA and related term sheet):

• The repayment in full in Cash of the Prepetition Term Loan Claims with the proceeds of the New Secured Bonds and Rights Offering. The New Secured Bonds will mature five (5) years from issuance and bear cash interest at a rate of LIBOR plus 9.5%.
• The exchange of the existing Notes Claims for (a) 94.25% of the New Equity (subject to dilution from the conversion of the New Convertible Bonds and the Employee Incentive Plan) and (b) the right to participate in the Rights Offering on a pro rata basis for the purchase of 94.25% of the New Convertible Bonds to be issued by Reorganized Pioneer pursuant to the Rights Offering.
• To the extent holders of Pioneer Interests vote to accept the Prepackaged Plan, holders of Pioneer Interests will receive (a) 5.75% of the New Equity (subject to dilution from the conversion of the New Convertible Bonds and the Employee Incentive Plan) and (b) the right to participate in the Rights Offering on a pro rata basis for the purchase of 5.75% of the New Convertible Bonds to be issued pursuant to the Rights Offering, even though the valuation of the Debtors set forth in this Disclosure Statement does not merit any distribution to holders of Pioneer Interests.
• The Rights Offering will be partially backstopped by the Consenting Noteholders pursuant to the Backstop Commitment Agreement.
• Certain members of the Company’s senior management will purchase approximately $1.795 million of New Convertible Bonds pursuant to the Backstop Commitment Agreement.
• The total outstanding principal amount of New Convertible Bonds upon issuance will be up to $135 million, inclusive of the Backstop Commitment Premium (as defined below) and the New Convertible Bonds will mature in 5 years and 6 months from issuance and bear payable-in-kind interest at 5%.

DIP Financing

In connection with execution of the RSA the Debtors have secured a $75.0mn of debtor-in-possession ("DIP") financing facility from PNC Bank, National Association (“PNC”). The DIP financing has a 5-month term and will bear interest, at the Debtors’ option, of (i) at the Base Rate plus 1% or (ii) at LIBOR plus 2%. The DIP financing includes an annual unused facility fee of 0.50% and letter of credit fees. Upon the Debtors' emergence, the DIP financing will be converted into an exit financing facility.

Prepetition Capital Structure

As of the Petition Date, the Debtors had approximately $475.0mn in principal amount of total funded indebtedness comprised of:

1. approximately $175.0mn in principal amount outstanding under the Prepetition Term Loan Credit Agreement and
2. approximately $300.0mn in principal amount outstanding under their 6.125% senior unsecured notes due March 15, 2022.

Summary of classes, claims, voting rights and projected recoveries (defined terms are as defined in the Disclosure Statement)

• Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 3 (“ABL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 4 (“Prepetition Term Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 5 (“Notes Claims”) is impaired and entitled to vote on the Plan. Expected recovery is 4-32%. Each Holder of an Allowed Notes Claim shall receive its pro rata share of (i) 94.25% of the New Equity (and, if Class 10 does not vote to accept the Plan, such percentage will increase to 100%), subject to dilution by the New Equity issued upon conversion of the New Convertible Bonds (inclusive of the Management Commitment Convertible Bonds, the Rights Offering Convertible Bonds and the Premium Convertible Bonds) and the Employee Incentive Plan and (ii) Subscription Rights to acquire its pro rata share of $116,121,000 in New Convertible Bonds (and the corresponding Stapled Special Voting Stock) in accordance with the Rights Offering Procedures.
• Class 6 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 7 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is NA.
• Class 8 (“Subordinated Claims”) is impaired, deemed to reject and entitled to vote on the Plan. Expected recovery is 0%. All Allowed Subordinated Claims, if any, shall be discharged, cancelled, released, and extinguished, and will be of no further force or effect. No Holder of Allowed Subordinated Claims will receive any distribution or recovery on account of such Allowed Subordinated Claims.
• Class 9 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is NA.
• Class 10 (“Pioneer Interests”) is impaired and entitled to vote on the Plan. Expected recovery is $700k-$6.0mn. Each Holder of an Allowed Pioneer Interest shall receive:
  • If Class 10 votes to accept the Prepackaged Plan, its Pro Rata share of (i) 5.75%  of  the  New  Equity, subject to dilution by the New Equity issued upon conversion of the New Convertible Bonds (inclusive of the Management Commitment Convertible Bonds, the Rights Offering Convertible Bonds and the Premium Convertible Bonds) and the Employee Incentive Plan and (ii) Subscription Rights to acquire its Pro Rata share of $7,084,000 in New Convertible Bonds (and the corresponding Stapled Special Voting Stock) in accordance with the Rights Offering Procedures.
  • If Class 10 does not vote to accept the Prepackaged Plan, its Pro Rata share of Subscription Rights to acquire its Pro Rata share of $7,084,000 in New Convertible Bonds (and the corresponding Stapled Special Voting Stock) in accordance with the Rights Offering Procedures.

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