US WELL SERVICES: Hit by both lower oil prices and the Coronavirus, the publicly traded oil services company cuts back on staff and salaries. http://bit.ly/USWS03202020 Last Article: http://bit.ly/USWS03042020
Posts for BlackRock Capital Investment
On March 3, 2020 troubled publicly traded US Well Services (ticker:USWS) published its IVQ 2019 results and held a conference call. The bottom line: in the last quarter of the year the bottom fell out of the market for electric fracturing of oil wells. Here are extracts from the conference call transcript:
“Throughout the course of the year, market conditions deteriorated, culminating in a sharp deceleration activity during the fourth quarter. U.S. Well Services was adversely impacted by customer-driven decisions to delay jobs and longer than anticipated holiday shutdowns. As a result, U.S. Well Services active fleets experienced lower utilization than in prior quarters…Revenue for the fourth quarter was $92.7 million, which represents a 29% sequential decline relative to the third quarter of 2019. USWS generated an adjusted EBITDA of approximately $12.1 million for the fourth quarter as compared to $35.3 million for the third quarter of 2019.”
That’s a two-thirds drop in EBITDA in a short period. No wonder that the stock price of USWS is down to $1.07. That’s much lower than the last time we wrote about the struggling oil services business back on October 3, 2019. Then the stock – at a then all time low – was at $1.82. Only some $50mn in cash and the fact that several drills are operating for customers seems to keeping USWS from imploding. Management does not seem worried but the BDC Credit Reporter notes the $274mn of debt on the balance sheet and the much deteriorating market conditions. We don’t want to be unfair but these seem like ingredients for a bankruptcy (again) or equivalent.
From a BDC perspective, all the lenders who got repaid when the company went public recently must be sighing in relief. At one point not so long ago, there was over $100mn of BDC capital invested, mostly in debt in the company before its transformation into a public company. Now, there are still BDCs with equity exposure, but the amount at September 30, 2019 (we don’t have all the relevant BDCs results yet) was $9.4mn at cost. The BDCs involved were PennantPark (PNNT); Capitala Finance (CPTA) and BlackRock Capital (BKCC). The first two have reported and – curiously – PNNT seems to have increased its exposure from a immaterial $0.7mn to a more material $3mn. Their discount is only (21%), presumably because stock was purchased more recently and cheaply. CPTA’s equity is discounted by as much as four-fifths.
We’ll continue to watch the company’s progress, but the likelihood is high that this will end badly for US Well Services – managerial optimism notwithstanding. For the BDCs involved that would almost certainly result in a complete realized loss on all invested capital, given the debt sitting higher on the balance sheet.
We’ve written about Juul Labs, and it’s relationship with deep-pocketed minority investor Altria before. Now we hear from a Wall Street Journal report that the SEC is taking an interest in one of the largest melt-down in a company’s value in recent memory. According to the WSJ “E-cig makers have until May 20  to submit to the FDA applications to have their devices approved for sale on the market”, but Juul may have problems getting the nod, even with Altria’s help.
As before, we remain unclear how the ongoing uncertainty at Juul will affect the two BDCs with exposure – the two BlackRock public BDCs : Blackrock Capital Investment (BKCC) and BlackRock TCP Capital (TCPC). Neither BDC has yet reported IVQ 2019 results, so our valuation and exposure data remains from the IIIQ 2019. We shall wait and see.
The winner of the M&A Bad Timing Award – Altria – has written down its investment in Juul Labs. Again. The consumer products giant wrote down its investment in Juul – the controversial e-vaping company – by $4.1bn. An earlier write down had been taken for $4.5bn in October 2019. It was only in December 2018 that Altria acquired 35% of the common stock of Juul for $13bn.
Now Juul faces lawsuits both from users and from governmental authorities that could cost untold billions. Already, the toll is showing up in the company’s results : “The Richmond, Virginia, company on Thursday reported that it had swung to a loss in the fourth quarter from the associated costs, citing burgeoning legal cases that it expects to grow“.
We’ve hesitated till now to add Juul Labs to the BDC credit Reporter’s Under Performers list given that the new 2023 Term debt in which two BDCs have exposure was trading at close to par on September 30, 2019 and remains valued at only a (2%) discount to par at time of this writing. Nonetheless, we’ve decided to add the company, with a Corporate Credit Rating of 3 (Watch List) based on the possibility of a potentially huge but currently unknowable amount having to be paid out as compensation for the many vaping deaths and other damage. Not to mention the legal costs and reputational impact to the company, which may yet prove fatal. The Altria write-down was a timely trigger for our own downgrade.
Two-thirds of the $52mn of BDC debt exposure is held by BlackRock TCP (TCPC) and the other third by sister firm Blackrock Capital (BKCC). That’s $4.8mn of annual income at risk. We don’t expect there will be any immediate threat to Juul’s debt, but down the road there’s a reasonable risk of serious trouble, as we’ve seen with other companies whose products have suddenly become controversial. Think Mallinckrodt and opioids.
Canadian retailer Red Apple Stores has been under-performing since 2014, according to the BDC Credit Reporter’s way of marking these things. At September 30, 2019, the only BDC with exposure is BlackRock Capital (BKCC) with $29.7mn in second lien debt, preferred and equity. The last two are valued at zero and the debt at a (24%) discount, up from a (29%) discount in June.
However, when we checked on November 3, 2019 the bid-ask for the debt – which is institutionally traded and available on Advantage Data’s Middle Market Loans module, we found the discount unchanged from June, so we’re not sure why there was this modest increase in valuation between the second and third quarters.
We are continuing to rate Red Apple CCR 4 (Worry List). That means we believe the ultimate resolution is more likely to be a loss than full repayment. $2.3mn in annual investment income remains at risk of interruption and – given its junior nature – the entire investment could yet be lost. Once again BKCC provided no color on the company’s performance in its Conference Call and public information is sparse. (The last time BKCC provided any insights into this major portfolio company’s performance was in the IIIQ of 2017, when the BDC was “working with” management to cut marketing expenses to boost EBITDA). We don’t expect any immediate developments at Red Apple, but we could be surprised given the thin amount of public information and the BDC’s reticence to discuss.
During the BlackRock Capital (BKCC) IIIQ 2019 Conference Call on October 31, 2019 , we learned that the $24.2mn second lien loan in AGY Holdings, subsidiary of KAGY Holdings, has been placed on non accrual. No date was given. The reason for the move was given by BKCC as the need to “fund various initiatives at the business at this time. And so it does reflect sort of things going on in the business that are generally operational things that we wanted to do“. BKCC is both investor and lender, with another $24.8mn in first lien debt still current.
With this move BKCC reduces the FMV of its second lien debt at one fell swoop from a discount of (1%) to (29%) and loses ($2.9mn) of annual investment income. That’s a material impact on BKCC: 3.7% of Investment Income and almost 8% of Net Investment Income. Should the first lien debt go the way of the second lien and the $11mn of equity and Preferred, written to zero, the loss of income would be even worse. Overall, BKCC has invested $60mn in KAGY/AGY, and still values the investment at $42mn.
We have found very little information about the glass yarn manufacturer but Advantage Data records and the occasional word from BKCC management indicates this has been a troubled credit since 2012 and has been restructured before with only limited results so far. We have to at least consider the possibility that this could yet turn out to be a complete write-off given that the common stock and Preferred have no value and the second lien has just been discounted.
The other BDC with exposure is sister fund BlackRock TCP Capital (TCPC) with $16mn invested at cost. Included therein is $8.6mn at cost in a $10.3mn second lien tranche identical to that of BKCC. If that’s placed on non accrual as well, $1.1mn of annualized investment income will be affected. The investment was carried at a big premium last quarter so the unrealized depreciation involved could be material.
For our part, we had carried KAGY Holdings in the under-performing group at CCR 5, due to the non-accrual on the Preferred. However, we’d left AGY as “performing” and a CCR 2 rating. In the absence of third party information, we were led by the high valuations given the company for both its first and second lien debt. That was too generous. We’ve now rated the second lien as CCR 5 (Non Performing) and the first lien at CCR 4 (Worry List). Fool me once, etc.
On October 2, 2019 the stock price of publicly traded U.S. Well Services (USWS) reached a 52 week and all-time low price in its short history of $1.82. That was more bad news for the three BDCs with $66mn of equity at cost invested in the company. Ever since the company underwent a reverse capitalization back in November 2018 and was listed on the NASDAQ, its price has headed downward. That impacted the BDCs involved, whose fair market value at June 2019 was lower than at March, as the stock price dropped from $7.98 to $4.20. That put a dent in the FMV values of PennantPark Investment (PNNT), Capitala Finance (CPTA) and – most of all – BlackRock Capital (BKCC). Coincidentally or otherwise, all 3 BDCs reported lower NAV Per Share in the quarter.
Look for a repeat in the third quarter as the stock price of USWS dropped to $2.19 at the end of the IIIQ. That’s roughly another (50%) drop in the last 3 months and should result in a further unrealized loss of ($16mn) or more. At the 52 week low price, the loss would be even higher.
Unfortunately for the BDCs involved their common stock holdings are “locked up” and cannot be disposed off till November. By then, the value of the USWS common will be down by (75%) or more compared to cost. Not inconceivable is that the oil services company – which we wrote about last on July 13, 2019 – could file for Chapter 11, wiping out all $66mn of the stock – mostly received as part of a debt for equity swap last year.
Not to rub things in, but this story is part of the broader troubles in the oil field services sector, which the BDC Credit Reporter has been warning bout for months and which we most recently opined about on September 6, 2019.