Ion Geophysical missed debt payments back in December and looked to be on that road to at least Chapter 11 bankruptcy
News Friday after the close was that Ion has been able to negotiate a debt standstill thus today’s rise
It’s still possibly going to need a Hail Mary pass or reconstruction to survive long term
Ion Geophysical Corporation (NYSE: IO) has not had a good time of it recently. Being an asset-light services company in the offshore oil, gas and maritime sector hasn’t been a good place to be of late. More specifically, with the retreat from fossil fuel exploration, there are fewer customers buying less of their seismic data library. It’s just not a good place to be.
Ion Geophysical has further problems, in that the cost structures – and debt burden – are set up for a higher revenue organization. It’s that debt burden that is the most immediate problem.
As part of the business background, the company admitted back in August that oil companies just weren’t spending on the sort of things Ion Geophysical does. What there were, was run-offs from extant contracts, signing new business just wasn’t happening at any great rate. That’s a significant business problem of course.
This is compounded by the debt burden the company carries. Either from gearing up for a future that never arrived, or not cutting back expenses when the new work river faded to a trickle. In December this meant the company missed an aggregate $12.3 million in bond principal and interest payments.
As is usual in such cases this cross triggers default on other borrowings by the company. So, debt they’ve got to pay back, they’re asset-light so there’s nothing to sell to pay it, there’s no immediate sign of an upturn in the business case. Well, what option is there other than Chapter 11, possibly even Chapter 7?
Ion Geophysical stock was therefore grumbling along at option levels. Then over this long weekend – or after the close on Friday, same thing – came the news that Ion Geophysical has been able to agree on a standstill agreement on those debts. The unpaid interest on the bonds/notes is to stand still until Feb 15, PNC Bank will also do the same on the revolving credit balance thereby lifting, for a time, that cross-default problem.
At which point the Ion Geophysical stock bounces 55% premarket this morning.
The jump is because it’s an announcement that it’s not bust yet. But in the medium term, well, there’s still that problem. Ion Geophysical is cash flow negative (never mind profits), has debts considerably larger than cash resources and no immediate sign of a grand upturn in signings of new business. So, where does Ion Geophysical go from here?
It’s possible to think that something wonderful will happen in this next month. It’s also possible to think that the stock price rise at Ion just gives a higher point from which to short the stock into a likely Chapter 11. Given that Ion Geophysical is an asset-light organization it would be unlikely there was a return for stockholders in a recapitalization.
A reasonable conclusion is to think of Ion Geophysical stock as being stub equity akin to an option. But which way the option should be played, put or call, that’s the difficult part of it.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.