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C&J Energy Services Ltd (NYSE:CJES) Hoping For A Turnaround

C&J Energy Services Ltd (NYSE:CJES) Hoping For A Turnaround
Written by
Alex Carlson
Published on
May 12, 2016
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InsidrFinancial

Investors were shocked to find out that C&J Energy Services Ltd (NYSE:CJES) had obtained a waiver regarding a loan covenant breach. The company had used the last remaining availability under its revolving credit facility, and as a result there was no access to further extensions of credit. As of May 6, the company's cash balance was $137M. A smaller than expected Q1 loss was not enough to overshadow this alarming news. The question now is can CJES make a comeback or is bankruptcy around the corner?C&J Energy Services describes itself as "a leading provider of well construction, well completions, well support and other complementary oilfield services to oil and gas exploration and production companies. As one of the largest completion and production services companies in North America, C&J offers a full, vertically integrated suite of services involved in the entire life cycle of the well, including directional drilling, cementing, hydraulic fracturing, cased-hole wireline, coiled tubing, rig services, fluids management services and other special well site services. C&J operates in most of the major oil and natural gas producing regions of the continental United States and Western Canada. The company also has an office in Dubai and is working to establish an operational presence in key countries in the Middle East."In Q1, CJES reported a loss of $0.61 per share, which beat expectations by $0.08 per share. The company reported revenues of $269.6 million, which was 32% lower than a year ago and $43 million lower than analyst's estimates. But what investors zeroed in on was this:

Low utilization and pricing levels due to the ongoing industry downturn had a negative impact on our operational and financial performance for the first quarter, which caused us to fall out of compliance with the Minimum Cumulative Consolidated Bank EBITDA covenant required to be tested as of March 31, 2016 under the credit agreement governing our credit facilities. We have obtained a limited waiver agreement from our lending group with respect to this covenant violation effective from March 31, 2016 through May 31, 2016. Also, as a condition to the effectiveness of the waiver, the maximum borrowing capacity under the revolving credit facility was reduced to $300.0 million, which is equal to the availability previously determined by the collateral coverage covenant. We are actively involved in ongoing discussions with the lenders to fully resolve this matter. We have engaged Kirkland & Ellis LLP and Fried, Frank, Harris, Shriver & Jacobson LLP as our legal advisors and Evercore as our financial advisor to assist our Board of Directors and management team in the evaluation of alternatives to our capital structure and other financing options.

The past few years have been trying for CJES with the oil price crash. The company's debt burden came about by acquiring the onshore well production and completion businesses of Nabors Industries in a nearly $1.5 billion deal in 2014 when shares traded as high as $33. Then in March, the architect of this deal, CEO Josh Comstock died unexpectedly. CFO Randy McMullen was then named CEO. He said:

"The first quarter of 2016 was, on many levels, one of the most difficult and challenging quarters in C&J's history. The sudden and unexpected passing of our founder and former Chairman and Chief Executive Officer Josh Comstock was a terrible tragedy in the midst of challenging times that tested the strength of our Company. I am extremely proud that all of us have rallied together to ensure Josh's vision of Operational Excellence continues, which reflects upon the strength and cultural integrity of our organization. We have a first-class team of executives and employees with the experience, work ethic and dedication to move the Company forward with the continued goal of delivering differentiated value to all of our customers. As a result of their efforts and commitment, C&J Energy Services is one of the largest, preeminent providers of oilfield services in North America. I am confident that we have the right people and plan in place to guide our Company through these difficult market conditions to the next industry upcycle."

Currently trading with a market cap of just $53 million, we believe that CEO Randy McMullen and his team of advisors will come to a solution with creditors and avoid bankruptcy. The 56% drop in price to $0.46 per share is an over-reaction and we expect shares to rebound once the picture becomes clearer. We will be updating Insider Financial as soon as we know more. For continuing coverage on CJES, sign up for our free newsletter today and get our next hot stock pick!Disclosure: We have no position in CJES and have not been compensated for this article.

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