PQ – Model and March 2009 Comments

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PQ Fast Look: I took some PQ common shares yesterday at just over a buck as described in the Holdings Watch section below. The following is my quick model with assumptions which I find to be pretty conservative:

The main things I think about when looking at the model vs their plans:

  • they have set capex at $80 to $100 million
  • my model spills out $120 mm of cash flow on the low end of guidance, the high end of costs and some pretty bearish prices for the year with fat differentials to boot.
  • at year end they had borrowed $130 million on a $150 million line and the fear hear is that the coming redetermination (see the breakout from the 10K below the model) will take the ceiling from $150 to some number below $130 million.
  • They had $24 mm in cash at year which would help absorb a lower redetermination if need be and they could monetize some of their 20.9 Bcfe of hedges with an average floor of $8.02 per Mcfe.


From the 10K Regarding the Borrowing Base and the Redetermination:

  • stuff that scared people in yellow
  • stuff that takes the edge off in orange
On October 2, 2008, the Company and PetroQuest Energy, L.L.C. (the “Borrower”) entered into the Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., Calyon New York Branch, Bank of America, N.A., Wells Fargo Bank, N.A., and Whitney National Bank. The Credit Agreement provides the Company with a $300 million revolving credit facility that permits borrowings based on the available borrowing base as determined in accordance with the Credit Agreement. The Credit Agreement also allows the Company to use up to $25 million of the borrowing base for letters of credit. The Credit Agreement matures on February 10, 2012; provided, however, if on or prior to such date the Company prepays or refinances, subject to certain conditions, the Notes, the maturity date will be extended to October 2, 2013. As of December 31, 2008, the Company had $130 million of borrowings outstanding under (and no letters of credit issued pursuant to) the Credit Agreement.
The borrowing base under the Credit Agreement is based upon the valuation as of January 1 and July 1 of each year of the reserves attributable to the Company’s oil and gas properties. The initial borrowing base is fixed at $150 million until the first borrowing base redetermination, which is scheduled to occur by March 31, 2009. The Company or the lenders may request two additional borrowing base redeterminations each year. Each time the borrowing base is to be redetermined, the administrative agent under the Credit Agreement will propose a new borrowing base as it deems appropriate in its sole discretion, which must be approved by all lenders if the borrowing base is to be increased, or by lenders holding two-thirds of the amounts outstanding under the Credit Agreement if the borrowing base remains the same or is reduced.
At December 31, 2008, the borrowing base under the Credit Agreement exceeded the Company’s outstanding borrowings by $20 million; however, as a result of the declines in commodity prices since the establishment of the borrowing base, the Company anticipates that its next regularly scheduled borrowing base redetermination, which is scheduled to occur by March 31, 2009, will result in a borrowing base of less than $150 million. As a result of the redetermination, the Company may be unable to borrow any additional funds under the Credit Agreement, and if the revised borrowing base is less than $130 million, the Company will be obligated to repay the amount by which its aggregate credit exposure under the Credit Agreement exceeds the revised borrowing base within forty-five days after the revised borrowing base is determined. At December 31, 2008, the Company had cash and cash equivalents of approximately $24 million that the Company believes would be sufficient to repay amounts that may be required as the result of the redetermined borrowing base. 

PQ Thoughts Nutshell: Their borrowing base is probably headed lower. That’s not the end of the world for them. There capital budget of $80 to $100 mm is below cash flow (my estimate and the Street’s) in any event which along with the previously referenced $24 mil should allow them to work through any hit to the borrowing base in a timely fashion and still come close to maintaining production levels.

Holdings Watch: From March 10:  PQ - Bought the common just under $1.04. At the time of the earnings report I saw I thought they had gone into survival mode running a limited capital program to make it through this period of low prices. I’m taking a small slice, not a big swing here. But its a good company, with an excellent track record that has more debt than is currently thought wise by the markets. I think they will make it but of course there is no guarantee of that. Rumors abound that they are having a tough time with their bank line redetermination (see yesterday’s post for comments on that process) and those rumors may or may not be true. But buying it for a buck is likely a perpetual option on again what are a good set of assets and a capable management team.  See the Stuff We Care About Today section for a brief model and more thoughts here.

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