A major shareholder and antagonist of Calfrac Well Services Ltd. has submitted a competing plan to recapitalize the ailing oil field services company, which would see a larger portion of its debt swapped for equity and give the shareholder, Wilks Brothers LLC, a controlling stake in the firm.
Calgary-based Calfrac has been hard hit by the recent drop in oil prices and fall in drilling activity. In mid-July, the company, one of the best known names in Canadian oil field services, laid out a plan to avoid insolvency by swapping roughly $510-million worth of debt for equity as part of a court-supervised restructuring.
On Tuesday, Texas-based Wilks Brothers, which owns around 20 per cent of Calfrac shares and about half of its second-lien debt, submitted a counteroffer to Calfrac’s board. The alternative plan would see Wilks Brothers buy up a large portion of Calfrac debt it does not already own, then swap its debt for shares. It would also pay Calfrac $80-million in cash. The combined debt-for-share swap and payment would give Wilks Brothers a 60-per-cent stake in the company.
The proposal is the latest shot in a drawn-out struggle between Calfrac and Wilks Brothers, which is controlled by billionaire Texan oilmen Dan and Farris Wilks. Wilks Brothers acquired a stake in Calfrac in 2016, and built up its position to become the company’s largest shareholder. Two years ago, Wilks Brothers changed its status from passive to activist investor.
This isn’t Wilks Brothers’ first run at Calfrac since the oil market downturn sent the company reeling. In June, the activist fund submitted two consecutive proposals to the company’s board, suggesting that it swap its second-lien debt for Cafrac’s U.S. assets. The board rejected both proposals, saying they “significantly undervalued” the company’s U.S. business and would leave other debt holders with insufficient collateral.
The latest proposal goes further, suggesting that shareholders and debt holders effectively hand over control of the company in return for a significant reduction in indebtedness. Following the transaction, Wilks Brothers would be allowed to select three out of five Calfrac board members.
Calfrac spokesman Scott Treadwell declined to comment on the proposal.
For the new proposal to succeed, Wilks Brothers will need to overcome support for the original plan among Calfrac’s other debt holders. According to a late-July statement from Calfrac, investors holding 66 per cent of the company’s outstanding senior unsecured notes have agreed to support the original restructuring plan.
In a statement on Tuesday, Wilks Brothers tried to sell its alternative proposal by calling into question the legitimacy of Calfrac’s original plan. If the original plan proceeds, Wilks Brothers said, it “would instead result in a continuing highly leveraged Calfrac, provide inferior recoveries to stakeholders, and is designed to unfairly enrich certain key insiders and a small select group of stakeholders of the company.”
The alternative plan would leave Calfrac with around $95-million worth of debt, compared with $286-million of debt under the company’s original restructuring plan, according to Wilks Brothers. Under the proposal, existing shareholders would be left with a roughly 5-per-cent stake in the reorganized company, while senior unsecured debt holders would gain a 35-per-cent equity stake.
The relationship between Wilks Brothers and Calfrac is already messy. The two sides have been battling each other in court since 2018, when Calfrac accused Wilks 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.
Last week, Calfrac reported a net loss of $277-million in the quarter, as revenues dropped 79 per cent.
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