Emergence from Voluntary Reorganization under Chapter 11 / Fresh Start Accounting (Notes)

9 Months Ended

Sep. 30, 2020

Reorganizations [Abstract]

Reorganization under Chapter 11 of US Bankruptcy Code Disclosure [Text Block]

Emergence from Voluntary Reorganization under Chapter 11

Reorganization and Chapter 11 Proceedings

On March 1, 2020 (the “Petition Date”), Pioneer Energy Services Corp. (“Pioneer”) and its affiliates Pioneer Coiled Tubing Services, LLC, Pioneer Drilling Services, Ltd., Pioneer Fishing & Rental Services, LLC, Pioneer Global Holdings, Inc., Pioneer Production Services, Inc., Pioneer Services Holdings, LLC, Pioneer Well Services, LLC, Pioneer Wireline Services Holdings, Inc., Pioneer Wireline Services, LLC (collectively with Pioneer, the “Pioneer RSA Parties”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Chapter 11 proceedings were being jointly administered under the caption In re Pioneer Energy Services Corp. et al (the “Chapter 11 Cases”).

In connection with the Bankruptcy Petitions, the Pioneer RSA Parties entered into a restructuring support agreement (the “RSA”) with holders of approximately 99% in aggregate principal amount of our outstanding Term Loan (the “Consenting Term Lenders”) and holders of approximately 75% in aggregate principal amount of our Prepetition Senior Notes (the “Consenting Noteholders” and together with the Consenting Term Lenders, the “Consenting Creditors”). Pursuant to the RSA, the Consenting Creditors and the Pioneer RSA Parties made certain customary commitments to each other, including the Consenting Noteholders committing to vote for, and the Consenting Creditors committing to support, the restructuring transactions (the “Restructuring”) to be effectuated through a plan of reorganization that incorporates the economic terms included in the RSA (the “Plan”). The Pioneer RSA Parties filed the Plan with the Bankruptcy Court on March 2, 2020.

After commencement of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

On May 11, 2020, the Bankruptcy Court entered an order, Docket No. 331 (the “Confirmation Order”) confirming the Plan. On May 29, 2020 (the “Effective Date”) the conditions to effectiveness of the Plan were satisfied, and we emerged from Chapter 11.

The commencement of the Chapter 11 Cases constituted an event of default that accelerated our obligations under our Prepetition Senior Notes, the Prepetition ABL Facility, and Term Loan. Under the Bankruptcy Code, holders of our Prepetition Senior Notes and the lenders under our Term Loan and the Prepetition ABL Facility were stayed from taking any action against us as a result of this event of default. On the Effective Date, all applicable agreements governing the obligations under the Term Loan, Prepetition Senior Notes and Prepetition ABL Facility were terminated. The Term Loan and Prepetition ABL Facility were paid in full and all outstanding obligations under the Prepetition Senior Notes were canceled in exchange for 94.25% of the pro forma common equity (subject to the dilution from the Convertible Notes and new management incentive plan).

On the Effective Date, we entered into a $75 million senior secured asset-based revolving credit agreement which was later amended and reduced to $40 million in August 2020 (the “ABL Credit Facility”), and issued $129.8 million of aggregate principal amount of 5% convertible senior unsecured pay-in-kind notes due 2025 (the “Convertible Notes”) and $78.1 million of aggregate principal amount of floating rate senior secured notes due 2025 (the “Senior Secured Notes”), all of which are further described in Note 7, Debt.

Also on the Effective Date, by operation of the Plan, all agreements, instruments, and other documents evidencing, relating to or connected with any equity interests of the Company, including the existing common stock, issued and outstanding immediately prior to the Effective Date, and any rights of any holder in respect thereof, were deemed canceled, discharged and of no force or effect. Pursuant to the Plan, we issued a total of 1,049,804 shares of our new common stock, with approximately 94.25% of such new common stock being issued to holders of the Prepetition Senior Notes outstanding immediately prior to the Effective Date. Holders of the existing common stock received an aggregate of 5.75% of the proforma common equity (subject to the dilution from the Convertible Notes and new management incentive plan), at a conversion rate of 0.0006849838 new shares for each existing share.

As part of the transactions undertaken pursuant to the Plan, we converted from a Texas corporation to a Delaware corporation, filed the Certificate of Incorporation of the Company with the office of the Secretary of State of the State of Delaware, and adopted Amended and Restated Bylaws of the Company.

Backstop Commitment Agreement

Prior to filing the Plan, we entered into a separate backstop commitment agreement with the Consenting Noteholders and certain members of our senior management (the “Backstop Commitment Agreement”), pursuant to which the Consenting Noteholders and certain members of our senior management committed to backstop approximately $118 million and $1.8 million, respectively, of new convertible bonds to be issued in a rights offering. As consideration for this commitment, we committed to make an aggregate payment of $9.4 million and $0.1 million to the Consenting Noteholders and certain members of our senior management, respectively, in the form of additional new convertible bonds, or in cash if the Backstop Commitment Agreement was terminated under certain circumstances as forth therein. As a result, we incurred a liability and expense at the time we entered into the Backstop Commitment Agreement for the aggregate amount of $9.6 million (the “Commitment Premium”) which was recognized in our Predecessor condensed consolidated financial statements as of and for the three months ended March 31, 2020. The Commitment Premium was settled in conjunction with our emergence from Chapter 11 and the issuance of the Convertible Notes.

Debtor-in-Possession Financing

On February 28, 2020, we received commitments pursuant to the Commitment Letter from PNC Bank, N.A. for a $75 million asset-based revolving loan debtor-in-possession financing facility (the “DIP Facility”) and a $75 million asset-based revolving exit financing facility. On March 3, 2020, with the approval of the Bankruptcy Court, we entered into the DIP Facility and used the proceeds thereunder to refinance all outstanding letters of credit under the Prepetition ABL Facility in connection with the termination of the Prepetition ABL Facility and to pay fees and expenses in connection with the Chapter 11 proceedings and transaction and professional fees related thereto.

The DIP Facility provided financing with a 5-month maturity, bearing interest at a rate of LIBOR plus 200 basis points per annum, and contained customary covenants and events of default. The DIP Facility was terminated upon our emergence from the Chapter 11 Cases on May 29, 2020.

Chapter 11 Accounting

Pre-petition restructuring charges — All expenses and losses incurred prior to the Petition Date which were related to the Chapter 11 proceedings are presented as pre-petition restructuring charges in our Predecessor condensed consolidated statements of operations, including $9.6 million of expense incurred for the Commitment Premium pursuant to the Backstop Commitment Agreement.

Reorganization items, net — Any expenses, gains, and losses incurred subsequent to and as a direct result of the Chapter 11 proceedings are presented as reorganization items in our condensed consolidated statements of operations. Reorganization items consisted of the following (amounts in thousands):

	Successor				Predecessor
	Three Months Ended September 30, 2020		Four Months Ended September 30, 2020		Five Months Ended May 31, 2020
Gain on settlement of liabilities subject to compromise	$	—	$	—	$	(291,378)
Fresh start valuation adjustments	—		—		284,392
Legal and professional fees	2,522		3,263		26,038
Unamortized debt costs on liabilities subject to compromise	—		—		2,003
Accelerated stock-based compensation	—		—		713
Loss (gain) on rejected leases	—		403		(378)
DIP facility costs	—		—		513
	$	2,522	$	3,666	$	21,903

Contractual interest expense on our Prepetition Senior Notes totaled $7.6 million for the five months ended May 31, 2020, which is in excess of the $3.1 million included in interest expense on our Predecessor condensed consolidated statements of operations because we discontinued accruing interest on the Petition Date in accordance with the terms of the Plan and ASC Topic 852.Fresh Start Accounting

Fresh Start Accounting

In connection with our emergence from bankruptcy and in accordance with ASC Topic 852, we qualified for and adopted fresh start accounting on the Effective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company, and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.

In accordance with ASC Topic 852, with the application of fresh start accounting, we allocated the reorganization value to our individual assets and liabilities (except for deferred income taxes) based on their estimated fair values in conformity with ASC Topic 805, Business Combinations. The amount of deferred taxes was determined in accordance with ASC Topic 740, Income Taxes. The Effective Date fair values of our assets and liabilities differed materially from their recorded values as reflected on the historical balance sheets.

Reorganization Value

The reorganization value represents the fair value of the Successor Company’s total assets before considering liabilities and is intended to approximate the amount a willing buyer would pay for the Company’s assets immediately after restructuring. The reorganization value was derived from the enterprise value, which represents the estimated fair value of an entity’s long-term debt and equity. As set forth in the Plan, the enterprise value of the Successor Company was estimated to be in the range of $275 million to $335 million with a midpoint of $305 million. However, the third-party valuation advisor engaged to assist in determining the enterprise value subsequently revised this range to $249 million to $303 million, with a midpoint of $276 million, which was filed with the Bankruptcy Court in order to update the initial assumptions for current information. Based on the estimates and assumptions discussed below, we estimated the enterprise value to be the midpoint of the range of estimated enterprise value of $276 million.

The following table reconciles the enterprise value to the estimated fair value of our Successor Common Stock as of the Fresh Start Reporting Date (dollars in thousands, except per share data):

Enterprise value	$	276,000
Plus: cash and cash equivalents	10,592
Less: fair value of debt	(145,420)
Total implied equity (prior to debt issuance costs on equity component on Convertible Notes)	141,172
Less: equity portion of Convertible Notes	(123,088)
Fair value of Successor stockholders’ equity	$	18,084
Shares issued upon emergence	1,049,804
Per share value	$	17.23

The following table reconciles enterprise value to the reorganization value of our Successor’s assets to be allocated to our individual assets as of the Fresh Start Reporting Date (amounts in thousands):

Enterprise value	$	276,000
Plus: cash and cash equivalents	10,592
Plus: current liabilities	65,799
Plus: non-current liabilities excluding long-term debt	6,626
Less: debt issuance costs on Successor debt	(6,394)
Reorganization value of Successor assets	$	352,623

With the assistance of our financial advisors, we determined the enterprise and corresponding equity value of the Successor using various valuation methods, including (i) discounted cash flow analysis, (ii) comparable company analysis and (iii) precedent transaction analysis. The use of each approach provides corroboration for the other approaches.

In order to estimate the enterprise value using the discounted cash flow (DCF) analysis approach, management’s estimated future cash flow projections through 2024, plus a terminal value calculated assuming a perpetuity growth rate and applying a multiple to the terminal year’s projected earnings before interest, tax, depreciation and amortization (EBITDA), were discounted to an assumed present value using our estimated weighted average cost of capital (WACC), which represents the internal rate of return (IRR).

The comparable company analysis provides an estimate of the company’s value relative to other publicly traded companies with similar operating and financial characteristics, by which a range of EBITDA multiples of the comparable companies was then applied to management’s projected EBITDA to derive an estimated enterprise value.

Precedent transaction analysis provides an estimate of enterprise value based on recent sale transactions of similar companies, by deriving the implied EBITDA multiple of those transactions, based on sales prices, which was then applied to management’s projected EBITDA.

Certain inputs and assumptions used to estimate the enterprise value are considered significant unobservable inputs which are classified as Level 3 inputs under ASC Topic 820, Fair Value Measurements and Disclosures, including management’s estimated future cash flow projections. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the enterprise value and equity value projections, are inherently subject to significant uncertainties beyond our control, and accordingly, our actual results could vary materially.

Valuation Process

The fair values of our principal assets (including inventory, drilling and production services equipment, land and buildings, and intangible assets), and our liabilities were estimated with the assistance of third-party valuation advisors. The cost, income and market approaches were utilized in estimating these fair values. As more than one approach was used in our valuation analysis, the various approaches were reconciled to determine a final value conclusion. Further, economic obsolescence was considered in determining the fair value of our inventory and property and equipment. The fair value was allocated to our individual assets and liabilities as follows:

Inventory — Inventory valued consisted of spare parts and consumables that support our international, coiled tubing and wireline operations. The fair value of the international spare parts and coiled tubing inventory was determined using the

indirect method of the cost approach, with adjustments for economic obsolescence. For wireline inventory, the cost basis was adjusted to account for the changes in cost between the acquisition date and the valuation date.

Property and Equipment — Property and equipment valued consisted of leasehold improvements, machinery and equipment, transportation equipment, office furniture, fixtures and equipment, computers and software, construction-in-progress and assets held for sale. The fair value of our property and equipment was estimated using the cost approach and market approach, while the income approach was considered in the context of the economic obsolescence analysis which was applied to certain assets. As a part of the valuation process, the third-party advisors performed site inspections and utilized internal data to identify and value assets.

Land and Buildings — Land and buildings valued consisted of four facilities and the underlying land, for which the fair value was estimated using the cost approach and sales comparison (market) approach, with adjustments for economic obsolescence to certain assets.

Intangible Assets — Intangible assets valued consisted of trademark and tradename, for which the fair value was estimated using the relief-from-royalty income approach. As a part of the valuation process, the third-party advisors considered overall revenue and cash flow projections and guidance on long-term growth rates. Additionally, above or below market leases and contracts and relationships were examined and determined to have no fair value. The value of our intangible assets will be amortized using the straight-line method over the economic useful life, which we estimated to be ten years.

Senior Secured Notes — The fair value of the Senior Secured Notes was estimated by applying a stochastic interest rate model implemented within a binomial lattice framework that considers the call provisions associated with the notes and captures the decision of prepaying the notes or holding to maturity by evaluating the optimal decision at each time step constructed within the lattice model.

Convertible Notes — The fair value of the Convertible Notes was estimated by applying a binomial lattice model and a recovery rate adjustment model, which provides a quantitative method for estimating the yield for a debt or debt-like security based on an observed market yield for a security of a different seniority. Certain inputs and assumptions used to derive the fair value of the Convertible Notes are considered significant unobservable inputs which are classified as Level 3 inputs under ASC Topic 820, Fair Value Measurements and Disclosures, including the company’s stock price, the volatility and the market yield related to the Convertible Notes.

Consolidated Balance Sheet

The adjustments set forth in the following consolidated balance sheet as of May 31, 2020 reflect the effects of the transactions contemplated by the Plan and executed on the fresh start reporting date (reflected in the column entitled “Reorganization Adjustments”), and fair value and other required accounting adjustments resulting from the adoption of Fresh Start Accounting (reflected in the column entitled “Fresh Start Accounting Adjustments”).

	As of May 31, 2020
(in thousands)	Predecessor		Reorganization Adjustments			Fresh Start Accounting Adjustments			Successor
ASSETS
Cash and cash equivalents	$	21,253	$	(10,661)	(1)	$	—		$	10,592
Restricted cash	4,452		11,721		(2)	—			16,173
Receivables:
Trade, net of allowance for doubtful accounts	33,537		—			—			33,537
Unbilled receivables	9,163		—			—			9,163
Insurance recoveries	23,636		—			—			23,636
Other receivables	5,256		1,000		(3)	—			6,256
Inventory	21,012		—			(6,883)		(18)	14,129
Assets held for sale	1,825		—			29		(19)	1,854
Prepaid expenses and other current assets	4,817		—			952		(20)	5,769
Total current assets	124,951		2,060			(5,902)			121,109
Property and equipment, at cost	1,082,704		—			(886,733)		(21)	195,971
Less accumulated depreciation	655,512		—			(655,512)		(21)	—
Net property and equipment	427,192		—			(231,221)			195,971
Intangible assets, net of accumulated amortization	—		—			9,370		(22)	9,370
Deferred income taxes	10,897		—			(2,157)		(23)	8,740
Operating lease assets	5,234		—			—			5,234
Other noncurrent assets	13,247		(5,023)		(4)	3,975		(24)	12,199
Total assets	$	581,521	$	(2,963)		$	(225,935)		$	352,623
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	24,601	$	(9,478)	(5)	$	—		$	15,123
Deferred revenues	121		—			—			121
Commitment premium	9,584		(9,584)		(6)	—			—
Debtor in possession financing	4,000		(4,000)		(7)	—			—
Accrued expenses:
Employee compensation and related costs	4,970		—			—			4,970
Insurance claims and settlements	23,517		—			—			23,517
Insurance premiums and deductibles	5,269		—			—			5,269
Interest	3,775		(3,731)		(8)	—			44
Other	12,436		4,329		(9)	(10)			16,755
Total current liabilities	88,273		(22,464)			(10)			65,799
Long-term debt, less unamortized discount and debt issuance costs	175,000		(53,831)		(10)	20,070		(25)	141,239
Noncurrent operating lease liabilities	4,189		—			—			4,189
Deferred income taxes	4,296		—			(3,225)		(26)	1,071
Other noncurrent liabilities	1,366		—			—			1,366
Total liabilities not subject to compromise	273,124		(76,295)			16,835			213,664
Liabilities subject to compromise	308,422		(308,422)		(11)	—			—
Stockholders’ equity:
Predecessor common stock	8,893		(8,893)		(12)	—			—
Successor common stock	—		1		(13)	—			1
Predecessor additional paid-in capital	553,631		(553,631)		(14)	—			—
Successor additional paid-in capital	—		98,413		(15)	40,545		(27)	138,958
Predecessor treasury stock, at cost	(5,098)		5,098		(16)	—			—
Accumulated deficit	(557,451)		840,766		(17)	(283,315)		(28)	—
Total stockholders’ equity	(25)		381,754			(242,770)			138,959
Total liabilities and stockholders’ equity	$	581,521	$	(2,963)		$	(225,935)		$	352,623

(1)Represents the following net change in cash and cash equivalents:

Cash proceeds from Convertible Notes	$	120,187
Cash proceeds from Senior Secured Notes	75,000
Payment to fund claims reserve	(950)
Payment to escrow remaining professional fees	(10,771)
Payment of professional fees	(9,468)
Payment in full to extinguish DIP Facility	(4,000)
Payment of accrued interest on DIP Facility	(55)
Payment of DIP Facility fees	(177)
Payment in full to extinguish Prepetition Term Loan	(175,000)
Payment of accrued interest on Prepetition Term Loan	(3,677)
Payment of prepayment penalty on Prepetition Term Loan	(1,750)
	$	(10,661)

(2)Represents the following net change in restricted cash:

Payment to fund rejected leases claims reserve	$	950
Payment to escrow remaining professional fees	10,771
	$	11,721

(3)Represents recognition of a receivable for a portion of the proceeds from the issuance of the Senior Secured Notes which was received in June 2020.

(4)Represents the reclassification of previously paid debt issuance costs from deferred assets to offset the carrying amount of long-term debt.

(5)Represents the payment of professional fees which were incurred prior to emergence.

(6)Represents the settlement of the Backstop Commitment Premium upon issuance of the Convertible Notes.

(7)Represents the payment to extinguish the DIP Facility.

(8)Represents the payment of accrued interest on the Prepetition Term Loan and DIP Facility.

(9)Represents the increase in accrued expenses for fees which were incurred upon our emergence from Chapter 11.

(10)Represents the following changes in long-term debt, less unamortized discount and debt issuance costs:

Payment in full to extinguish Prepetition Term Loan	$	(175,000)
Issuance of Senior Secured Notes at Par	78,125
Recognition of debt issue costs on Senior Secured Notes	(2,913)
Recognition of liability component of Convertible Notes issuance	47,225
Recognition of debt issuance costs on liability component of Convertible Notes	(1,268)
	$	(53,831)

Due to the Convertible Notes’ embedded conversion option, the liability and equity components were reported separately, as described further in Note 7, Debt.

(11)Represents the settlement of liabilities subject to compromise in accordance with the Plan, for which the resulting gain is as follows:

Prepetition Senior Notes	$	300,000
Accrued interest on Prepetition Senior Notes	8,422
Liabilities subject to compromise	308,422
Cash paid by holders of Prepetition Senior Notes	118,013
Issuance of equity to Prepetition Senior Notes creditors	(17,044)
Notes Received by Prepetition Senior Note holders	(118,013)
	$	291,378

(12)Represents the cancellation of Predecessor common stock.

(13)Represents the issuance of Successor common stock to prior equity holders and to settle the Prepetition Senior Notes.

(14)Represents the cancellation of Predecessor additional paid-in capital.

(15)The changes in Successor additional paid-in capital were as follows:

Recognition of equity component of Convertible Notes	$	82,546
Issuance of Successor common stock to Prepetition Senior Notes creditors and prior equity holders	18,083
Recognition of debt issuance costs of Convertible Notes equity component	(2,216)
	$	98,413

Due to the Convertible Notes’ embedded conversion option, the liability and equity components were reported separately, as described further in Note 7, Debt.

(16)Represents the cancellation of Predecessor treasury stock.

(17)Represents the cumulative impact to Predecessor retained earnings of the reorganization adjustments described above.

(18)Represents the fair value adjustment to inventory, as described further in the previous section under the heading “Valuation Process”.

(19)Represents the fair value adjustment to assets held for sale, as described further in the previous section under the heading “Valuation Process”.

(20)Represents deferred compensation associated with the excess of fair value over the par value of Convertible Notes purchased by senior management, which is compensation to the Successor and therefore was expensed in June 2020.

(21)Represents the following fair value adjustments to property and equipment:

	Predecessor Historical Value		Fair Value Adjustment		Successor Fair Value
Drilling rigs and equipment	$	1,010,612	$	(832,294)	$	178,318
Vehicles	41,283		(28,561)		12,722
Building and improvements	16,619		(13,742)		2,877
Office equipment	12,231		(11,743)		488
Land	1,959		(393)		1,566
	$	1,082,704	$	(886,733)	$	195,971
Less: Accumulated Depreciation	(655,512)		655,512		—
	$	427,192	$	(231,221)	$	195,971

(22)Represents the fair value adjustment to recognize the trademark and tradename of Pioneer Energy Services Corp. as an intangible, as described further in the above section under the heading “Valuation Process”.

(23)Represents the recognition of the noncurrent deferred tax asset as a result of the cumulative tax impact of the fresh start adjustments herein.

(24)Represents a prepaid tax asset established as part of the fresh start accounting adjustments.

(25)Represents the following fair value adjustments to long-term debt less unamortized discount and debt issuance costs:

Fair value adjustment to the liability component of the Convertible Notes	$	23,195
Discount on Senior Secured Notes	(3,125)
	$	20,070

Due to the Convertible Notes’ embedded conversion option, the liability and equity components were reported separately, as described further in Note 7, Debt.

(26)Represents the derecognition of the deferred tax liability as a result of the cumulative tax impact of the fresh start adjustments herein.

(27)Represents the fair value adjustment to the equity component of the Convertible Notes.

(28)Represents the cumulative impact of the fresh start accounting adjustments discussed above and the elimination of Predecessor accumulated earnings.