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Dune Energy (AMEX:DNE), a Houston-based exploration and development company, may restructure to address its debt load and is open to approaches from bankers, Chairman Alan Gaines told mergermarket. The company is also currently renegotiating its USD 40m revolver with lender Wells Fargo.
Gaines denied any possibility of selling assets or the whole company, even though bankers said Dune is likely to consider such moves.
The company, with a market cap of USD 23m, recognizes that it is over-levered in the current commodity pricing environment, Gaines said. It will look at “any and all possibilities” to improve the low trading on its senior debt and convertible preferred shares.
Dune has a 4.3x leverage ratio through 1Q09 based on trailing twelve month EBITDA of USD 67m and USD 290m in long-term debt. In 1Q09, Dune recorded a net loss of roughly USD 12m versus an USD 8.7m net loss in 1Q08. It faces the prospect of drawing down on its revolver this year to pay for capital expenditures, with cash at the end of 1Q09 of USD 9.6m and working capital expenditures likely totaling USD 26m the remainder of this year, according to CEO James Watt during last month’s earnings conference call.
Total liquidity currently stands at USD 36m after USD 8.8m worth of letters of credit are counted against its USD 35m revolver. If the company draws down on its revolver, it also threatens to break its one debt covenant, which requires Dune to maintain USD 10m of liquidity in cash or availability under the revolver.
The company has retained no advisors and is no longer working with Jefferies & Company, which advised it on the acquisition of Goldking Energy Corporation in 2007, Gaines said. The company has “no problem talking to anyone with a good idea,” he said. It has banking contacts and will be able to hire a financial advisor if it looks to complete a transaction, he said.
The company has already been talking with restructuring advisors, said two sources familiar with the situation and a sellside analyst.
Gaines said that the company has “no intention, desire or requirement” to sell assets, and is particularly uninterested in such a move in the current low-priced environment. “That is a zero possibility,” he said. The company’s assets are all core, as it sold assets in the Barnett Shale last year. It also would not consider a sale of the whole company because of low prices, he said.
Several bankers, however, said that because Dune is overleveraged it is likely to look at divestitures. One banker said he felt the company is an “active and willing” seller, and therefore there will likely be a “clearing price” available for the assets.
The company’s assets are located in the Gulf Coast in Texas and Louisiana. They include Bayou Couba with 280 BCF potential, Chocolate Bayou with current net production of 370 BOPD and 3.6 M MCFG/D, Garden Island Bay with 30 wells producing around 30 MMCFe/d and over 231 MMBO and 252 BCFG produced, and Leeville current net production of 565 BOPD and 1.8 MMMCFD.
However, even if Dune is interested in selling assets, its lenders may not allow a sale because the properties may not command a high valuation due to limited upside, a second banker said. It may make more sense for the company to sell itself outright, the first and second bankers said.
The company as a whole could attract bidders because it has producing assets, an industry analyst said. It is a “good buy,” but is in an unpopular area right now. Because no bidders have yet emerged for the company, a private company or a smaller unit of a large public company may come in and make a move, the analyst added.
In the meantime, CEO James Watt said in the 7 May earnings call that Dune is in lender negotiations to extend its USD 40m revolver from the current maturity date of 2010, to 2012, and to increase the availability under revised terms and conditions. Lenders re-determined the revolver at USD 35m from USD 40m in February.
The company has been in discussions with its lenders for a while, and expects at the very least to have the USD 40m reinstated, Gaines said. The chances of not having the USD 40m reinstated are “literally zero,” as the company has a good relationship with its bank, he said.
The analyst was optimistic that the company will be able to negotiate with its lenders successfully and avoid bankruptcy. Banks have been forgiving with the energy sector, which means the lenders are likely to work with the company toward a solution.
Dune has used law firm Eaton & Van Winkle in the past.
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