Energy REIT Scare

chart01.pngLast week, Energy XXI filed for relief under Chapter 11, further weakening CorEnergy Infrastructure Trust’s ability to receive lease payments from its major tenant Energy XXI GIGS Services. Energy XXI is the guarantor of the lease and Energy XXI GIGS Services is an affiliate of Energy XXI.

In mid-2015, CorEnergy was involved in an acquisition and leaseback transaction with Energy XXI. CorEnergy purchased Grand Isle Gathering System, a subsea pipeline system located in the Gulf of Mexico, from Energy XXI and then leased back the property. This particular transaction was part of Energy XXI’s company strategy to increase liquidity and improve their leverage metrics while the oil prices were in steep decline.

Energy XXI shareholders have suffered from a major blow. According to the company’s restructuring support agreement, both the preferred and common shareholders will receive no recovery at the end of the restructuring process. All preferred stock will be cancelled. As a matter of fact, once the bankruptcy-filling announcement was made, the common shares traded on NASDAQ plummeted to less than $0.20.

We certainly cannot say that this news comes as a total surprise. Energy XXI’s share prices had already started to freefall when oil prices started to drop. Later, the company confirmed that they could file bankruptcy protection and restructure their balance sheet. The actual surprise is the fact that equity holders have been forsaken. Brand new equity will be issued to senior secured noteholders, with equity management incentives being initiated. Investors that figured they could make some easy money investing in a financially stressed company made the wrong bet and probably lost all of their capital. If you would like more information regarding the details of Energy XXI’s current situation, please review Dallas Salazar’s article (click here).

Energy XXI GIGS Services hasn’t filed for bankruptcy and is not subject to the restructuring agreement. CorEnergy most definitely acted fast reminding investors of this fact on the day that Energy XXI’s bankruptcy was announced. Having said that, multiple investors were fearful that the company would be negatively affected and CorEnergy’s share price dropped by 9%.

Due to the fact that the bankruptcy filing represents a default event in the current lease agreement, CorEnergy didn’t have much of a choice but to continue the lease and waive the rights to terminate it. However, the waiver does contain conditions regarding particular terms such as the failure of an approved restructuring, or liquidation of the company.

CorEnergy takes the position that Energy XXI will need those assets in order to survive the restructuring. They don’t believe it will interrupt any of the lease payments. In the same manner, Energy XXI did attempt to put both suppliers and vendors at ease by stating that they are not planning to interrupt any payments.

Of course CorEnergy is now being held hostage based on Energy XXI’s performance, which is certainly not a great place to reside. The stock rallied during the weeks prior to the bankruptcy announcement.

In conclusion, I have yet to see any catalyst in order to take advantage of the REIT’s depressed price. Energy XXI management expects to emerge from the restructuring in September 2016; so, for the meantime, I will sit safely on the sidelines.

Source: CorEnergy Infrastructure Trust(NYSE:CORR),Energy XXI Ltd.(NasdaqGS:EXXI)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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