Geokinetics Files for Bankruptcy (Again)

On June 25, 2018, Geokinetics filed for bankruptcy in Houston. The lead case title is Geokinetics Inc., et al., number 4:18-bk-33410. The first day hearing was held on June 26 with a hearing scheduled for June 29 at noon.

On the agenda for the June 29 hearing is the bid procedures motion along with the critical vendor motion.

2013 Chapter 11

This is after a prepackaged Chapter 11 proceeding in March 2013 which equitized $300M in debt and had the company emerging in May 2013. Remember, this was at a time when oil prices were over $100.  Oil didn’t cross that line for good until the summer of 2014, which was also a high for E&P upstream budgets.  The prepackaged bankruptcy addressed the balance sheet, but this may be a case where a little extra time in bk and a focus on the operations could have mitigated the need for a second filing.

The Geokinetics Chapter 22 raises a general question about prepacks. I am all for deferring unnecessary costs as long as possible in the hopes that they’ll go away, but if a filing occurs it is pretty rare that the company is a lean, mean operator. To put it another way, most companies that file for bankruptcy are the victims of both an economic downturn AND less than ideal management. A prepack tends to be a quick fix balance sheet restructuring with junior creditors pushed through. Will the uptick in prepackaged and RSA bankruptcies, as shown in an FTI study here, over the past few years come back to bite the sponsors in the form of a second filing? If anyone knows of a study showing the cost effectiveness of an operational turnaround within chapter 11, please comment below.

The Business

Geokinetics is hired in the oil & natural gas industry by typically large E&P’s to provide seismic survey data.  The data helps exploration, drilling, and field planning and requires specialized equipment, knowledge, and logistical expertise to perform, hence the decision to outsource this task by E&P’s. Geokinetics does this on a worldwide basis, and the trucks typically used in the process on land weigh 35 tons or more so fleet movement can be costly. The industry is highly susceptible to swings in oil and natural gas E&P budgets.

Declaration by David Crowley (CEO)

The documents are not exactly brimming with financial information.  The net loss of $53M in 2017 is highlighted, but top line collections in eight weeks of the cash flow budget total just $2.8M, not a lot of cash coming in the door to execute with. Based on the general narrative and a few specific statements, it seems likely that revenue took a nosedive over the past year.

The declaration also states that there is $49M of current assets on the books and $67M of long-term assets, related primarily to property costs. We know from the bridge loans and a Moelis prepetition payable that cash is scarce, and that AR is about $12.6M per the APA. That leaves about $36M of current assets as a question mark.

Long-term assets are likely most of the “property” & equipment that is included in the APA. There is a lot of specialty equipment and it is distributed around the world.

The capital structure is pretty simple.  $23.3M of 1st Priority Secured loans include a $5.6M revolver and $2M of recent bridge loans, incurred in the last week to get the company into bankruptcy. $15.7M is due under a 2nd Priority Secured loan.

DIP and Budget

The DIP loan provides for up to $15M, taking out the $2.1M of bridge loan debt incurred in the week leading up to the petition date, but priming the existing $5.6M revolver, which was taken over by Ascribe in the spring from Wells Fargo after failing to refi debt or raise equity (evidenced by the S-1 filed with the SEC) over the prior year.

Postpetition financing allows only for an expedited auction process and that’s about it. Whitebox Advisors and Highbridge Capital are providing the DIP and have a stake in the stalking horse bidder. They are motivated to get this deal done with minimal bid competition. No significant objections have been filed but it’s early and we’ll have to see what comes out of the hearing today.

Bid Procedures Motion, Stalking Horse Bid, and APA

SAExploration, a competitor in the industry, agreed to be the stalking horse bidder. The stalking horse bid provides a $20M purchase price for substantially all assets less cure costs up to $1M. A $1M stalking horse breakup fee plus out-of-pocket expenses is included in the agreement, so the next bid needs to come in at $21.5M to qualify.

Trade liabilities are not being assumed, unless a contract is being assumed, cured, and assigned.

SAExploration stock opened almost 50% higher ($10M in market cap) after announcing its stalking horse position. That gain eroded throughout the day however despite little on the docket that would indicate any major obstructions in the path to acquisition. SAE experienced a precipitous revenue drop in Q1 2018 itself, dropping YOY by 57% to $37M for the quarter.

This is all subject to an auction, which means the company’s advisors are actively soliciting higher bids. The stalking horse bid seems like a lowball offer given the $12M AR balance. It could have been necessitated by the lack of DIP financing available to the debtor or driven by the desire to have an offer in hand that would at least cover the Ascribe revolver.

Other First Day Motions

Critical Vendors: The debtors are seeking authority to pay $500,000 in critical vendor claims to keep the business operating through the sale. Included in that amount are certain 503(b)(9) claims. Based on informal objections brought forth by the US Trustee, categories were added to limit the Critical Vendor motion as follows:

• Proprietary Node Maintenance: $180,000
• Crew Vehicle and Equipment Parts: $130,000
• Foreign Vendors on projects to be assumed under SAE’s asset purchase agreement: $80,000
• Logistics and Transportation: $60,000
• Suppliers holding 503(b)(9) claims: $30,000
• Security & Asset Protection: $20,000

What it Means for Trade Creditors

There’s a $20M offer on the table, proceeds from which will pay a $15M DIP, a $21M senior secured note, and a $15M junior secured note. That doesn’t quite add up. Cash to be distributed to $35M of secured debt and any prepetition unsecured debt is just $4.1M per the cash budget, after paying $2.4M of professional fees. Ouch.

Prepetition trade is not likely to recover anything beyond critical vendor payments. Postpetition trade should be wary of the secured debt relative to the offer and provide goods and services on a CIA basis only up to the closing date.

If you are a trade vendor and would like to discuss your situation in this or any other case, contact us or email claimholder@bclaim.com.