C&J ENERGY SRV LTD COM USD0.01 (OTCMKTS:CJESQ) Looks Good Ahead Of A Recovery

At the beginning of last month, we told readers that our expectations of a C&J ENERGY SRV LTD COM USD0.01 (OTCMKTS:CJESQ) looked solid, and that the company would almost certainly be able to sort out some form of restructuring and avoid outright bankruptcy. It turns out we were wrong. However, C&J just announced a voluntary reorganization (chapter 11), and looks set to stage a recovery on the back of a revamped capital structure.Let's kick things off with a bit of background. C&J is an oil and gas well construction company – it builds out the infrastructure that large oil and gas companies need to operate. It does hundreds of millions of dollars in revenues every quarter, but it now trades at $0.31. The company has taken a real hit on the back of the commodity, specifically energy, price slump, and its core business has struggled. It's lost most of its value (more than 98%) in the last 15 months.So what's the situation with the restructuring? Well, C&J has racked up more than $1.4 billion in debt, and with the slump in oil and gas, got into a position where it couldn’t meet its obligations on this debt. This essentially gave it two options – come to an agreement with its creditors and restructure, or go bankrupt and cease to operate.This is why it lost so much value over the last few months. Markets were concerned that the creditors in question wouldn’t accept terms, and that this would force chapter 11. The creditors have accepted terms, however, and C&J is now in a position to rebuild from what looks to be a pretty solid base.Solid, yes, but there's still some capitalization issues. In order to write off the $1.4 billion debt, C&J is set to issue around $1.55 billion worth of shares. This is going to seriously dilute the existing base, and will be a serious point of contention between existing holders and the company going forward.

"The Company will issue one series of seven-year warrants to existing common stockholders, based on their pro rata share, exercisable for up to an aggregate of 6% of new common stock at a strike price of $1.55 billion."

There's also the potential for further dilutive financings going forward. C&J had around $143 million cash on hand at March 31, but chances are this has been eliminated as part of the restructuring. If it hasn’t, it won't last long, and making up the shortfall is going to require fresh issue. Indeed, there's already a backstop offering in place:

"The Backstop Parties have agreed to provide an equity rights offering for an investment in the Company in an amount of up to $200 million as part of the approved Plan (the “Rights Offering”). In accordance with the terms of the Restructuring Support Agreement and the Restructuring Term Sheet, the Rights Offering shall be consummated on the effective date of the Plan (the “Effective Date”) pursuant to a Backstop Commitment Agreement, which will also provide for a commitment premium of 5% of the $200 million committed amount payable in new common equity to the Backstop Parties."

This aside, there's still plenty of things that make C&J attractive right now. The restructuring should go through and the wider oil and gas space looks set for recovery. Yes, there's a very diluted share base right now, but as the company recovers the per share price increase should mitigate the value loss from the dilution.We're watching to make sure things stay on track with the restructuring. Shares are presently cheap enough that they could recover like they did after our first article on the company when they more than doubled.To get our CJESQ updates, subscribe to our newsletter below!Disclosure: We have no position in CJESQ and have not been compensated for this article.