Denbury Resources (DNR) (OTCPK:DNRCQ) appears set to emerge from bankruptcy soon after its restructuring plan was confirmed by the Bankruptcy Court. This plan will give second-lien noteholders most of the new equity in the company. Current shareholders will be left with Series B warrants equivalent to 2.5% of the new equity. The strike price for the warrants is roughly double Denbury’s estimated post-restructuring price, which may end up in the high-teens if Denbury has 50 million post-restructuring shares.

Bankruptcy Case

Denbury’s bankruptcy case has proceeded quickly. The company filed for bankruptcy on July 30 and had its Plan of Reorganization confirmed by the Bankruptcy Court on September 2. Denbury is targeting an effective date of September 16 for the plan, although the actual effective date may vary slightly.

At the time the plan becomes effective, Denbury’s $2.1 billion in bond debt will be exchanged for new equity and warrants. Denbury’s existing shares will be cancelled and old shareholders will receive Series B warrants.

Valuing The New Denbury

Denbury appears to be fairly competitive now that it has eliminated most of its interest costs. Going forward, Denbury should have minimal interest costs compared to around $9 in interest costs per barrel of oil before. This helps lower Denbury’s post-restructuring breakeven point to approximately $45 WTI oil.

It is currently uncertain how many post-restructuring shares Denbury will have. If it ends up with around 50 million shares post-restructuring (compared to 507 million shares pre-restructuring), I’d expect Denbury’s new shares to trade in the high-teens, reflecting a market capitalization of around $800 million to $1 billion.

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This would be a fair price for the current environment, which involves low-to-mid-$40s WTI strip prices for the next few years. This is a similar pricing environment to what was used in Denbury’s disclosure statement.

As part of its disclosure statement, Denbury forecast adjusted EBITDA to end up at around $230 million in 2021. A 4.0x EV/EBITDA multiple would then result in a valuation of $920 million, which would translate into an approximately $870 million market capitalization (net of debt). A 4.5x EV/EBITDA multiple would result in a market capitalization of approximately $985 million.

Source: Denbury Resources – Disclosure Statement

Denbury’s second-lien notes recently traded at around 50 cents on the dollar, which also points to Denbury’s post-restructuring price starting off in the high-teens, assuming 50 million post-restructuring shares. The second-lien bond prices should be pretty predictive of Denbury’s post-restructuring value given that they are converting into 95% of Denbury’s new equity (before dilution from the Management Incentive Plan).

Denbury’s Current Common Shares

Denbury’s current common shares are being cancelled and shareholders are not receiving new Denbury shares. Current shareholders are getting Series B warrants adding up to approximately 2.5% of Denbury’s new equity. The strike price will also depend on how many post-restructuring shares Denbury has; but if Denbury has 50 million post-restructuring shares, current common shareholders will receive approximately 1.25 million warrants with a strike price estimated at approximately $37.

Thus (in this example) for every approximately 400 current Denbury shares, one would receive approximately 1 Series B warrant. A rough estimate of the value of this warrant is $2.52 per warrant, or roughly 0.6 cents per current common share. This is based on a post-restructuring price of $18 per share, a strike price of $37 and 50% implied volatility, along with 50 million post-restructuring shares.

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At ~3 cents per share, Denbury’s common shares still look overpriced for the warrants they are receiving. This is especially true now that Denbury’s Plan of Reorganization has been confirmed with a near-term effective date, effectively ending the small hope that current shareholders would end up with more.

Conclusion

Denbury’s restructuring plan was confirmed by the Bankruptcy Court and it appears likely to emerge from bankruptcy during this week. Denbury has shed $2.1 billion in bond debt, leaving it with a relatively modest amount of remaining net debt (previously projected by Denbury to be around $158 million at the end of 2020). The reduced interest costs allow Denbury to reach breakeven cash flow (while maintaining production) at approximately $45 WTI oil, which should allow it to be competitive going forward.

Denbury’s second-lien noteholders will end up with 95% of Denbury’s new equity. Denbury’s post-restructuring value in the current oil pricing environment appears to be in the high-teens, assuming 50 million post-restructuring shares. Denbury’s current common shares still appear overvalued at 3 cents per share, as the value of the Series B warrants they are receiving appears to be roughly 0.6 cents per share.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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