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Convertible Bond Yielding > 20%


rukawa

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Based on something Sculpin posted I did a cap iq screen of all convertible yielding greater than 20%. Attached is the spreadsheet. I used Excel to filter out issuers with negative equity. A few that I noticed and have come up on other threads:

 

Argent Energy

Zargon oil & Gas

Twin Butte Energy

Pengrowth Energy

Toscana Energy

Fortress Paper

 

The Argent Energy Convertibles have defaulted and have a 350% yield to maturity.

convertible_bonds_v2.xls

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Based on something Sculpin posted I did a cap iq screen of all convertible yielding greater than 20%. Attached is the spreadsheet. I used Excel to filter out issuers with negative equity. A few that I noticed and have come up on other threads:

 

Argent Energy

Zargon oil & Gas

Twin Butte Energy

Pengrowth Energy

Toscana Energy

Fortress Paper

The Argent Energy Convertibles have defaulted and have a 350% yield to maturity.

 

I find there is too much senior debt ahead of the TBE debentures for my comfort - especially with oil down at $33. The Fortress 2019's are a good bet. Don't know Argent or Toscana enough to comment. I like the Zargon debentures and the Pengrowth ones are beginning to get interesting. Two others that may be attractive that I own are the Discovery Air debentures and Western One debentures - both series.

 

 

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Argent is interesting. Its an income trust with assets in the US. Capital structure is as follows:

 

65m USD Revolver (85m CAD)

148m CAD Convertible Debentures.

 

There are backed by assets of 226m CAD. Shares trade at 1 cent. Shares started falling when the company missed production targets.

 

On November 30 the bankers reduced the revolver from 80m USD to 45m USD due to falling commodity prices. Until Argent pays back the 20m they cannot pay dividends to the unit trust holders or interest on the convertibles. They have 60 days to resolve the issue.

 

http://www.argentenergytrust.com/news_release/509

 

So basically 226m CAD in assets with 86.1m CAD standing in front of the debentures. Lets say the assets sell for 100m CAD. Then

 

Debentures are worth

100m - 86.1m = 13.9m CAD

 

Percentage of face value

13.9m/148m = 9%

 

Currently the debentures trade for 2 dollars. So the upside assuming the oil and gas assets are sold at half their current value is 9/2 = 450%. The catalyst is the 60 day resolution period for the revolver which should be due be end of January. The convertibles were supposed to pay 6% interest this month and this has been suspended. A single interest payment would be triple the current value of the debentures.

 

I feel like I am missing something big here.

 

 

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  • 6 months later...

Based on something Sculpin posted I did a cap iq screen of all convertible yielding greater than 20%. Attached is the spreadsheet. I used Excel to filter out issuers with negative equity. A few that I noticed and have come up on other threads:

 

Argent Energy

Zargon oil & Gas

Twin Butte Energy

Pengrowth Energy

Toscana Energy

Fortress Paper

The Argent Energy Convertibles have defaulted and have a 350% yield to maturity.

 

I find there is too much senior debt ahead of the TBE debentures for my comfort - especially with oil down at $33. The Fortress 2019's are a good bet. Don't know Argent or Toscana enough to comment. I like the Zargon debentures and the Pengrowth ones are beginning to get interesting. Two others that may be attractive that I own are the Discovery Air debentures and Western One debentures - both series.

 

The Zargon debentures have doubled from the mid $20's in January to a current $53. Expecting announcement on the sales process in the next few weeks. Best bet is that the low decline >90% oil weighted Saskatchewan assets will be sold (1,500 boed) for >$50mm thus eliminating most of the debt ($65mm) senior to these debentures. The $58 million of the ZAR.DB will be backed by about 2,500 boed of low decline Alberta oil assets (about 75% oil, rest NG).

 

http://zargon.ca/wp-content/uploads/2016/05/Zargon-May-10-presentation-v7.pdf

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Argent is interesting. Its an income trust with assets in the US. Capital structure is as follows:

 

65m USD Revolver (85m CAD)

148m CAD Convertible Debentures.

 

There are backed by assets of 226m CAD. Shares trade at 1 cent. Shares started falling when the company missed production targets.

 

On November 30 the bankers reduced the revolver from 80m USD to 45m USD due to falling commodity prices. Until Argent pays back the 20m they cannot pay dividends to the unit trust holders or interest on the convertibles. They have 60 days to resolve the issue.

 

http://www.argentenergytrust.com/news_release/509

 

So basically 226m CAD in assets with 86.1m CAD standing in front of the debentures. Lets say the assets sell for 100m CAD. Then

 

Debentures are worth

100m - 86.1m = 13.9m CAD

 

Percentage of face value

13.9m/148m = 9%

 

Currently the debentures trade for 2 dollars. So the upside assuming the oil and gas assets are sold at half their current value is 9/2 = 450%. The catalyst is the 60 day resolution period for the revolver which should be due be end of January. The convertibles were supposed to pay 6% interest this month and this has been suspended. A single interest payment would be triple the current value of the debentures.

 

I feel like I am missing something big here.

 

From May monitor report:http://cfcanada.fticonsulting.com/argent/docs/Argent%20Third%20Montior_s%20Report_FINAL.pdf

Receipts and Disbursements (USD)
Receipts
Gross Purchase Price $ 45,575,000
Interim statement of adjustments 722,952
Net received by Monitor 46,297,952
Disbursements
OGAC success fee (505,750)
Escrow fund for final statement of adjustments held by Wells Fargo (505,025)
KERP/KEIP payments (1,435,041)
Cure payments (1,033,247)
Wind-down funds (1,129,194)
Interim distribution to Syndicate (39,100,000)
Total distributed (43,708,257)
Cash currently held by Monitor $ 2,589,695

 

So it looks like the 226 mm in assets sold for 46 mm! That's a big miss.

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Based on something Sculpin posted I did a cap iq screen of all convertible yielding greater than 20%. Attached is the spreadsheet. I used Excel to filter out issuers with negative equity. A few that I noticed and have come up on other threads:

 

Argent Energy

Zargon oil & Gas

Twin Butte Energy

Pengrowth Energy

Toscana Energy

Fortress Paper

The Argent Energy Convertibles have defaulted and have a 350% yield to maturity.

 

I find there is too much senior debt ahead of the TBE debentures for my comfort - especially with oil down at $33. The Fortress 2019's are a good bet. Don't know Argent or Toscana enough to comment. I like the Zargon debentures and the Pengrowth ones are beginning to get interesting. Two others that may be attractive that I own are the Discovery Air debentures and Western One debentures - both series.

 

The Zargon debentures have doubled from the mid $20's in January to a current $53. Expecting announcement on the sales process in the next few weeks. Best bet is that the low decline >90% oil weighted Saskatchewan assets will be sold (1,500 boed) for >$50mm thus eliminating most of the debt ($65mm) senior to these debentures. The $58 million of the ZAR.DB will be backed by about 2,500 boed of low decline Alberta oil assets (about 75% oil, rest NG).

 

http://zargon.ca/wp-content/uploads/2016/05/Zargon-May-10-presentation-v7.pdf

 

KaChing!....

 

Zargon Oil & Gas Ltd. Announces Sale of Zargon's Southeast Saskatchewan Assets for $89.5 Million

 

CALGARY, ALBERTA--(Marketwired - July 25, 2016) - Zargon Oil & Gas Ltd. (the "Company" or "Zargon") (TSX:ZAR)(TSX:ZAR.DB) has entered into a definitive agreement for the sale of all of its Southeast Saskatchewan assets for cash consideration of $89.5 million, subject to normal closing adjustments. The effective date of the transaction is July 1, 2016 and the transaction is expected to close in early September. The assets have the following attributes:

 

Production: 1,211 barrels of oil equivalent per day of low decline production - 95 percent oil and liquids (first half 2016 rates).

Proven plus probable reserves: 5.14 million barrels of oil equivalent - 96 percent oil and liquids (McDaniel & Associates Consultants Ltd. - Dec. 31, 2015).

The proceeds of the transaction will initially be used to eliminate Zargon's bank debt. As outlined below, Zargon's net debt (including debentures) will be approximately $35.0 million following the transaction:

 

Bank debt and net working capital - $65.0 million as of June 30, 2016.

Net sale proceeds after closing adjustments - $87.5 million.

Outstanding June 2017 Convertible Debentures - $57.5 million

Remaining Zargon Assets

 

With the completion of the Southeast Saskatchewan sale, Zargon's remaining assets will be highlighted by the Alberta Little Bow Alkaline, Surfactant, Polymer ("ASP") tertiary recovery project, the Alberta Taber and Bellshill Lake low decline oil properties, and the remaining Williston Basin North Dakota properties. The 2015 year end reserves and first half 2016 production rates for these properties are summarized below:

 

Production: 2,882 barrels of oil equivalent per day of low decline production - 80 percent oil and liquids.

Proven plus probable reserves: 15.76 million barrels of oil equivalent - 87 percent oil and liquids (McDaniel & Associates Consultants Ltd. - Dec. 31, 2015).

Undeveloped oil exploitation locations - 17 net locations (McDaniel & Associates Consultants Ltd. - Dec. 31, 2015).

Little Bow ASP tertiary recovery project - Currently, the ASP project is forecast to provide stable oil production for a few quarters. At higher oil prices, the existing ASP infrastructure can be utilized for multiple ASP phases and Polymer only projects seeking a 10 percent incremental oil recovery on over 80 million barrels of working interest oil-in-place.

Pro forma, upon successful completion of the sale of the Southeast Saskatchewan properties, Zargon's remaining assets are forecast to have the following attributes in the second half of 2016.

 

Oil and liquids production - 2,240 barrels per day.

Total production - 2,750 barrels of oil equivalent per day.

Base oil declines - Little Bow ASP; no decline, stable rates at recent levels: Other Alberta; 14 percent: North Dakota: 6 percent.

Average royalties - Alberta including ASP; 8 percent: North Dakota; 24 percent.

Operating Costs - Alberta including ASP; $18.0 million (annualized): North Dakota; $2.0 million (annualized).

2016 second half Capital Budget - ASP Polymer Injections; $1.8 million, Other Oil Exploitation Projects: $0.6 million, Abandonments and Site Reclamations; $0.3 million.

2017 Capital Budget - ASP Polymer Injections; $3.6 million, Other Oil Exploitation Projects: $1.5 million, Abandonments and Site Reclamations; $1.5 million. If oil prices improve from current levels, this budget can be increased to incorporate high-graded oil exploitation locations and the resumption of Alkaline and Surfactant injections in high-graded areas of the Little Bow ASP project.

Additional information regarding Zargon's low decline, oil exploitation properties are available on our website at www.zargon.ca. Zargon intends to release its Q2 2016 unaudited financial results on August 10, 2016, after market close.

 

Ongoing strategic alternatives process

 

Last year, Zargon announced the formation of a special board committee to examine alternatives that would maximize stakeholder value in a manner that would recognize the company's fundamental inherent value related to Zargon's long-life, low-decline conventional oil assets and the significant long-term oil potential related to the Little Bow ASP project. Scotia Waterous Inc. is the financial adviser for the committee.

 

The sale of Zargon's Southeast Saskatchewan assets is a significant step in this process. The strategic alternatives process is continuing and may include but is not limited to, a financing, merger or other business combination, sale of the company or a portion of the company's business or assets, or any combination thereof, as well as the continued execution of our business plan.

 

 

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It still seems like there is decent upside in the ZAR bonds with them trading at 80 and 11 months to maturity.

 

They can call them anytime and there is a change of control provision that would require them to offer par if they get taken out.

 

Yes there is a current yield of 7.5% and a yield to maturity of close to 28%. Not bad in a time of NIRP and ZIRP policy. After sale closes Company will only have debt of these convertibles ($57mm) and cash of about $22 million. My guess is that the North Dakota production (395 barrels a day, 2.1mm bbls proved and PDP value of $19.2mm) will be sold next for anywhere from $15mm to $25mm adding to the Company's cash pile.

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I believe there is a decent likelihood that these will be called or redeemed fairly soon.

 

The credit line will likely be renewed at around $45 million post this sale or at the next review on September 22 from $70 million today with PDP NAV dropping from $146.5 to $93.7 million with this sale. So they could eliminate the debentures now, save on annual interest cost and still have $10 million free on the credit line. 

 

On the sale of North Dakota assets, PDP NAV would drop to $74.5 million so, the credit line should be revised to around $36 million. Depending on how much they get for these assets with $15 million being bare minimum, they would have even less to use in percentage term on their credit line to redeem them.

 

Bottom line is that they now have flexibility on redeeming these debentures today or at maturity on June 30, 2017. I can't see them trading in the current range for very long.

 

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Never mind. I found out why.

"These securities have not been and will not be registered under the U.S. Securities Act (as defined herein) or any state securities laws. Accordingly, except to the extent permitted by the Underwriting Agreement (as defined herein) and in transactions exempt from the registration requirements of the U.S. Securities Act and applicable state securities laws, these securities may not be offered or sold within the United States. This short form prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of these securities within the United States. See "Plan of Distribution".

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If I understand correctly, to buy Canadian prefs you have to open brokerage account in Canada. It doesn't matter that Fido/IBKR allow you to buy Canadian stocks trading on TSX and Canadian prefs also trade like stocks on TSX. You still can't buy these prefs from USA Fido/IBKR accounts. You have to have Canada-based account.

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Ah, sorry for confusion. I got confused between Canadian pref threads and Canadian debenture threads. :)

 

I see that Fido also has some Canadian prefs available for international trading. Some that have been mentioned here are not available. So it is a mix for Canadian prefs (and non-retirement accounts only for international trading).

 

I don't see debentures mentioned available likely for the reason valcont specified.

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Zargon's bid or demand for their debentures has mysteriously disappeared since yesterday. If one can acquire them in the low $70's, you are looking at a relatively safe 50% return potential in less than a year.

 

They have already in cash 39% required to buy out that last piece of debt and they are still looking to sell more assets. With maturity on June 30, 2017, they have no choice but, to do something about it.

 

IMO, the return on this one looks more secure and enticing than FTP.DB.A due in 2019.

 

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Some more info on ZAR (from a friend on IV) with the common now moving up on heavy volume...

 

 

  Have been asked privately for more colour on Zargon so thought I would do a follow up post.

 

Its just math, consider Zargon in the current OG environment. There have been enough transactions to set sell precedent for the kind of oil assets ZAR owns.

 

At the bottom transactions from the distressed have often ranged between PDP & 1P values. PDP is exceptionally important given bank lines are based around these values, if an acquirer can purchase assets near PDP values the potential exists for the premium OG players to increase their liquidity (depending on how structured) while transacting at accretive metrics. In the case of Zargon pro-forma this could be done at the corporate level, de-leveraging while acquiring significant tax pools! (Zargon holds ~$279 million of high quality tax pools - March 31, 2016, including $144 million of non capital losses)

Zargon may find itself a target of the premium growth and yield players given the accretive nature of any transaction. Consider ZAR which pro-forma has:

 

Alberta Plains Properties Overview(Excluding Little Bow ASP)

-Production 1,452 bbl/d (2,012 boe/d) with Oil Prod’n Decline Rate 14% / year

- Little Bow ASP Oil Prod’n Decline Rate n/a (increasing rates)

(Management noted 2Q16 production of 530 bbl/d  increasing to 600 bbl/d through the remainder of 2016/17)

The above low 14% decline rate on Alberta Plains prodn with increasing production rates at Little Bow ASP will be noted by premium yield and growth players with higher production declines.

 

As management noted in their updated presentation:

Remaining Assets

Production: 2,882 barrels of oil equivalent per day (H1 2016) 80 percent oil and liquids

Even with the common @$1 per share the current EV would be under $70 million with ZAR trading under $25,000 flowing bbl. For 80% low decline oil & liquids with significant tax pools the accretion ZAR offers to an acquirer will be very tempting! Sure there will be some modest declines in prodn given the lack of current drilling, however this will further moderate an already low decline base and allow any acquirer to increase prodn quickly with less capital required to sustain current prodn. Additionally Zargons lack of drilling in 2015/6 with declining prodn provides egress with under-utilized facilities lowering capital efficiencies on new production additions.

 

However the kicker for me is not so much the above metrics but relevant PDP values, consider that most premium OG players trade at EV/PDP values between 2X (CPG) to above 4X(RRX) ZARs PDP value will be key to any transaction. With recent transaction between PDP and 1P this is important.

 

Proforma as per presentation ZAR has:

 

PDP Value $93.7 million. ZAR trades at less then 1X their engineer PDP to EV! (approx 0.65 EV/PDP @75c share!)

 

with AB Plains plus ASP ($50.6 million + $23.9 million = $74.5 million)

 

This suggests $19.2 million for ND asset, and using Arsenal recent transaction metrics in the U.S Bakken ZAR should receive PDP value or better. Even if we pencil in a value below $19 million this will push ZAR's debt below $20 million.(which suggests debs could rise closer to PAR from current levels) This means any further transactions at PDP values or a corporate sell at PDP should unlock about a $2 value for the common with debs at PAR.

 

With tax pools, low decline oil production, egress and a potential PDP price tag.... Zargon in its current form is not long for this world.(value will be unlocked or it most likely will be acquired)

 

ZAR should continue to trade much higher.

 

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  • 3 weeks later...

From Stockwatch and a new September presentation from Zargon post Sask asset sale.

 

http://zargon.ca/wp-content/uploads/2016/09/Zargon-Corporate-Update-Sept-1-2016-final.pdf

 

Zargon Oil & Gas Ltd. (ZAR) added two cents to 96 cents on 215,000 shares, after closing one asset sale and arranging another. The first sale involved all of its assets in southeast Saskatchewan. These are producing around 1,200 barrels of oil equivalent a day, and Zargon announced in late July that it would sell them for $89.5-million to an unidentified buyer that turned out to be TORC Oil & Gas Ltd. (TOG: $7.80). Both companies have now put out separate press releases announcing the closing of the sale. Zargon's press release added that another set of assets is being sold, this time in the Killam area of Alberta. These assets produced 133 barrels a day in the first half of the year (58 per cent oil and liquids) and will be sold for $4-million, with an effective date of Aug. 1 and an expected closing date in mid-September. Both sales are part of Zargon's "strategic alternatives process," a euphemism used by companies that are putting themselves and their assets up for sale. Zargon started the process just over a year ago. At the time, it had about $112-million in debt, including $51-million drawn on a $110-million credit facility. Over the months, the amount of the facility was chopped down while the drawn amount crept up, so that as of late June, 2016, Zargon was nearly $65-million drawn on a line that was just $70-million. That was apparently a good incentive for the alternatives process; the Saskatchewan asset sale was announced just a month later. Now the Killam assets are being sold as well. The two sales will remove nearly 1,350 barrels a day, or roughly one-third of Zargon's production, but will eliminate all bank debt and leave a tidy sum of cash. The company cannot rest easy yet, however. It still faces the maturity of $57.5-million in convertible debentures next June. As well, its credit facility is going to be reduced again as a result of the asset sales. The review date for the facility is Sept. 22.

 

President and chief executive officer Craig Hansen told Stockwatch that liquidity remains a key issue for Zargon. He noted that the company has about $26-million in available cash, and that if oil prices rise to around $47 (U.S.), the company will not need to draw on any of that cash for its second-half program. The program currently includes $1.8-million for polymer injections at the first phase of the core Little Bow ASP (alkaline surfactant polymer) project. This is producing a little under 600 barrels a day and is currently forecast to stay stable for a few quarters. If oil prices rise, however, Zargon could resume its alkaline and surfactant (AS) injections (which were suspended in February to reduce costs) and could even proceed with a modified phase 2 program. Mr. Hansen reckoned that Zargon would need to see oil prices of at least $45 (U.S.) before it might reactivate the AS injections, and at least $50 (U.S.) before it would consider phase 2. If the company had no liquidity issues, its ambitions might be different, but alas, that is not the case. Mr. Hansen said the company is keen to avoid any further credit problems and will not be aggressively demanding credit at the Sept. 22 meeting. He also acknowledged that the company will need to come up with a plan for next June's debenture maturity.

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I find the numbers a little odd but, here it is:

 

PDP NAV for Killam: $1.8 million

2P NAV: $6.2 million

 

It would indicate that this asset requires some investment to put reserves into production. Here is what is stated in the AIF:

 

"The Killam, Bellshill Lake and Taber South properties are expected to require numerous horizontal drainage wells to optimally exploit. The McDaniel Report has booked five undeveloped Killam Glauconite horizontal locations..."

 

In any case, looks like another great sale relative to where securities are trading at or highly accretive.

 

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  • 3 weeks later...

I am not sure that I fully understand the stock reaction (ZAR) over the past couple weeks but, the return here looks enticing. PDP NAV is $1.95 and proforma corporate decline rate is still 11% or certainly in top quartile and likely top 10% in Canada. Cheapest oil stock that I follow and again with 81% liquids.

 

The Taber property and other or non-core properties in Alberta do produce some heavy oil and it was around 27% of the corporate product mix starting the year. I am assuming that it has gone up with the sale of the Saskatchewan asset but, it is certainly not a majority of production based on the corporate presentation.

 

Of course, there was a very large jump in the stock in late July and mid-August on the announcement, then realization that the Saskatchewan sale was done at a very good price. Could be some profit taking.

 

The convertible still offers a very good return too IMO currently trading at $81 and maturing in June 2017. That is a yield to maturity of close to 40% or very high considering that they have $26 million in cash on hand with the only debt being this convertible or $57.5 million. They could easily borrow from their credit line what is missing to redeem in full. The credit line will likely get reset at around $45 million at the review that was due yesterday.

 

Uncertainty on the bank review, then lack of news so far could be a reason for the pull back.

 

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  • 4 weeks later...
  • 1 month later...

Once again, the Zargon debentures are now on sale following a 3 month decline from the stock that culminated this morning with someone at UBS getting out fast.

 

Yield to maturity in June 2017 is above 50% with the company actively looking for a solution and that is first item on the list:

 

"With the elimination of the Company's bank debt, the strategic alternatives process is continuing, but has been refocused to include, among other alternatives, a restructuring of the Company's current capital structure, the addition of capital to further develop the potential of the assets, the sale of the Company or a portion of the Company's assets, a merger, a farm-in or joint venture, or other such options as may be determined by the Company's Board of Directors to be in the best interests of the Company and its stakeholders. Zargon's Special Board Committee has engaged Macquarie Capital Markets Canada Ltd. ("Macquarie") as its exclusive financial advisor related to this component of its strategic alternatives process."

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aZAR-2421645&symbol=ZAR&region=C

 

They have $24.5 million of cash and the only debt is this convertible or $57.5 million at par. The stock is also a heck of a bargain based on most metrics.

 

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