I bought the Montage Resources 8.875 coupon bond maturing 15JUL2023.
music selection: “Sheperd Of Fire” — Avenged Sevenfold
Montage drills the dry shales in the Marcellus and Utica. They have premium acreage in the Utica and good fundamentals. The company previously went bankrupt and its assets were bought by another, stronger private company. That company has gone public as Montage Resources (MR) and has a strong balance sheet and good cash flows. It is mainly a gas producer but does produce about 25% of its revenue from oil and drip. This is much better than one of my other holdings, Gulfport, which runs about 90% of its revenue from natural gas.
The company has about 60% of its natural gas production hedged above the current market spot price and has time to wait for prices to firm up. The firm is exercising a lot of capital discipline and is running only one rig this year versus 2019’s two rigs. The focus is on the highest margin and best wells they can drill to ensure the operations are cash flow positive. Their all in sustaining cost for gas is about 1.40 USD/MMBtu. Today’s closing price per Bloomberg was 2.20 USD/MMBtu. Thus, the company can meet all its obligations, including debt service, even if gas prices fall from historic lows ANOTHER 36 percent. Any short term strength, including driven by Iran tensions, will allow the company to place additional hedges in place. I think my interest is safe with this company.
In the event the company cannot refinance (with projected interest coverage in most rational pricing scenarios at over 5 times, it is almost a mortal lock to refinance) a bankruptcy could occur. That would most likely be a reorganization but I assume a worst case liquidation scenario. I estimate about 73% recovery versus par in such a liquidation. I paid 88.7 today for CUSIP: 27890GAB6, thus my maximum principal loss would be about 17.7%. I don’t think that outcome is likely as the company can rehedge with any price strength between now at maturity in 2023.
My bond has a current yield of 10.1% and a yield to maturity of 12.95%. I can do better by selling the bond for par prior to maturity in the event of a gas price rally. This purchase pushes my cash on hand to negative 693 dollars. The Tailored Brands bond (CUSIP: 587118AE0) recently traded above par. I have put a good till canceled order in at par to lock in that gain and raise cash. It will probably take a few days for the sale to complete so I’ll pay a few dollars in margin interest.
Devour your prey raptors!