Calfrac Well Services Ltd. plans to swap about $510-million of its debt for equity in a court-supervised restructuring that will leave its shareholders with a small fraction of their stake in the struggling oil field services stalwart.
Calgary-based Calfrac also revealed that its largest shareholder and long-time antagonist, Wilks Brothers LLC of Cisco, Tex., floated two offers in June for its U.S. operations in exchange for the debt Wilks holds and some cash. The Calfrac board rejected the bids, arguing they undervalued the business and would mean jettisoning two-thirds of the company’s operations.
The two sides have been battling each other in court since 2018, when Calfrac accused Wilks, which is controlled by two billionaire brothers, of breaching a non-disclosure agreement with the goal of driving up borrowing costs so it could snap up Calfrac’s U.S. fracking business. A judge ruled in Calfrac’s favour last year, but the financial damages and costs have yet to be settled.
The developments highlight current as well as long-standing problems at Calfrac, one of the best known names in Canadian oil field services. The company provides such services as hydraulic fracturing, coiled tubing and cementing, all used to stimulate production from oil and gas wells.
Its financial health is dependent on capital expenditures by energy companies, and virtually all of them eliminated spending in the spring to deal with the oil price crash. The recapitalization is being done under the Canada Business Corporations Act, which allows it to restructure and continue paying its bills without seeking bankruptcy protection.
The company’s operations have recovered somewhat in recent weeks with crews back in the field in Canada and the United States, and it has cut costs, said Scott Treadwell, vice-president of capital markets and strategy at Calfrac.
“But the amount of activity is not enough to sustain the industry, let alone any company in the industry, so it needs to continue to get better,” Mr. Treadwell said.
Calfrac shares tumbled 15 per cent to 14 cents on the Toronto Stock Exchange on Tuesday. They have lost 93 per cent of their value in the past year, with the most severe drop occurring in March as energy and stock markets roiled because of the impact of the COVID-19 pandemic.
At Tuesday’s closing price, Calfrac has a market capitalization of about $20-million. That compares with more than $610-million five years ago.
Under the recapitalization plan, holders of Calfrac’s senior unsecured debt would get shares in the company in exchange for what they are owed. Calfrac will also issue $60-million in new notes, which will rank above second-lien debt, to a group that includes G2S2 Capital Inc., some existing debt holders and Matco Investments, which is owned by Calfrac executive chairman Ron Mathison.
Second-lien debt holders, meanwhile, would see no change in their holdings. Besides holding nearly 20 per cent of Calfrac stock, Wilks has about half of the second-lien debt.
After the recapitalization, the company will have cut its long-term debt by $570-million and its annual debt-service costs by $52-million, it said. Current shareholders will see their stake in the company cut to just 8 per cent, however. In addition, the new debt will be convertible into shares later.
Reached by phone, Wilks Brothers representative Matt Wilks said he had no comment on the developments at Calfrac. He is also chief financial officer of the family investment firm’s own fracking company, ProFrac Services.
The firm is run by Dan and Farris Wilks, who are active investors in the energy sector and big supporters of U.S. conservative political causes. They were among the largest donors to Texas Republican Senator Ted Cruz’s unsuccessful bid for the White House in 2016.
Wilks bought into Calfrac in 2016 and increased its interest to where it is now its largest shareholder. Two years ago, it shifted its status from passive to activist investor, pitting itself against management and their board.
Calfrac said on Tuesday that its board elected not to support the Wilks takeover bids for the U.S. operations because first-lien lenders would be left with just a third of the collateral and no debt reduction. Also, the remaining business would be left with a disproportionate amount of debt.
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