STP.DB $10.06 - Doubling Down on Distressed Debt

The alliterative title is my way of distracting from the fact that my previous post on STP debt was a terrible call. If you'd like to read that post, it can be found here. The short version is the company had debt obligations of around $32 million per year, and my prediction was for cash flow of around $32 million per year. However, cash flow came in much less than that, and the company's debt has now increased to a total of $603 million. (Including a finance lease).

A compensating factor is that the convertible debentures are now trading at 10 cents on the dollar. With $410 million in debt senior to the converts, that implies the company needs to be worth $430 million for the debentures to pay out. With operating cash flow last quarter of ~$5 million, the company wouldn't be worth that based on traililng results. The trailing results are terrible, because the company's performance at the McKay project has been very bad.

Hope is on the horizon however, with ICD installation proving productive. The company is using their last few quarters of time before bankruptcy sets in to install more ICDs, in hopes of turning things around. The following graph shows the potential of the new technology, as the results on the first well they installed ICDs in were excellent.

 

The debt is trading assuming the company will be bankrupt and debtholders receive a small recovery. However, if ICDs work long enough for the company to tread water for a year or two, there is potential for a significant return here.

 

My last prediction here was terrible, but I've (much more than) doubled down at recent low prices, and will count this as a double down/new recommendation when I calculate the results for my blog recommendations at the end of the year.

 

Disclosure: Long STP.DB

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