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Dune Energy (OTCBB: DUNR) Banking on Debt for Equity Solution to Keep Company Above Ground, Bankruptcy Remains a Real Possibility

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The future of Dune Energy (OTCBB: DUNR) remains in question as the independent energy company continues to search for a palatable solution to mounting liabilities that could push them into bankruptcy if they are not able to restructure their debt obligations. Those liabilities were laid out clearly in their most recent quarterly report in which it was noted “our current liabilities increased materially during the quarter and now exceed our current assets by $325.6 million.” DUNR stated “The primary reason for this significant change is the movement into the current maturity category of our $40 million term loan facility due March 15, 2012 and $296.8 million of Senior Secured Notes due June 1, 2012.”

It would appear that the only solution that could keep DUNR afloat is a debt for equity exchange with bondholders given the fact that obtaining financing from third parties could be a difficult task. What it seems to boil down to is that the bondholders currently hold the fate of DUNR’s business plans in their hands and whether they are willing to surrender that debt for equity or force bankruptcy remains unknown.

What could work to DUNR’s benefit is the simple fact that bondholders are in a no-win situation of sorts, they either trade the debt for equity in a struggling company or resign themselves to forcing bankruptcy and getting pennies on the dollar for their notes. That being said DUNR is obviously hoping that these bondholders will opt for the possible survival of the company, no matter how slim, rather than accepting its demise.

Not exactly helping DUNR’s position was their July press releases updating their drilling operations at Garden Island Bay in Louisiana. That release informed investors that the ORX SL 214 #1 well was being “temporarily abandoned” after being drilled and logged to a total depth of 19,670 feet (measured depth) and 19,550 feet (true vertical depth). While DUNR said that the well was “left capable for deepening or sidetracking operations at a later time” that didn’t exactly boost confidence or even assure investors that DUNR would be involved in those future operations.

James A. Watt, President and CEO of DUNR, tried to soften the blow of this announcement stating, “Although disappointed in the results of this well to date, we are encouraged by the fact that we encountered reservoir quality rocks with hydrocarbon shows in the prospective section.  We will now evaluate the data from the well and integrate it with the seismic to determine if a deepening or a side tracking operation would be warranted at a later time.  We anticipate continuing our conventional lower risk drilling programs within our existing fields, including Garden Island Bay”.

Again, looking back at their quarterly report, DUNR acknowledged that if they failed to restructure their debt or secure financing they may be forced to “consider other strategic solutions including, among other things, the sale of key assets and/ or the material curtailment of operations.” DUNR has stated that their primary focus would be the continued development and exploration efforts in their Gulf Coast properties and have indicated that they would “employ technical advancements, including 3-D seismic data, pre-stack depth migration and directional drilling, to identify and exploit new opportunities in our asset base” as well as plans “to employ the latest drilling, completion and fracturing technology in all of our wells to enhance recoverability and accelerate cash flows associated with these wells” but it is clear that if they can’t get their finances in order there will be no exploration or development.

It should also be recognized that production has dipped for DUNR, showing a year-over-year decrease from 3,768 Mmcfe for the first six months of 2010 to 3,065 Mmcfe for the same six month period of 2011. This decrease was attributed to normal reservoir declines which were not offset by increased production due to the limited amount of capital reinvestment made during 2011. DUNR detailed the decline in production volume for the quarter ended June 30, 2011 as 114 Mbbls of oil and 0.7 Bcf of natural gas or 1.4 Bcfe. This compares to 147 Mbbls of oil and 1.0 Bcf of natural gas or 1.9 Bcfe during the same period 2010.

This slip was also reflected in their revenues for the quarter ended June 30, 2011 which totaled $15.9 million compared to the $16.0 totaled in the quarter ended June 30, 2010. It seems investors have recognized that this trend downward will carry over as share price has plummeted since their July announcement regarding their operations at Garden Island Bay. Upon that announcement shares dropped from a high of 0.71 on July 5, 2011 to a low of 0.16 on July 6, 2011 before closing at 0.30.

Shares have steadily fallen since that date, hitting a 52-week low of 0.09 on August 19, 2011 and they now sit around the 0.10 – 0.11 range; well below their 50-day moving average of 0.344 and their 200-day moving average of 0.626.

The struggles that DUNR now face put their plans for the remainder of 2011 in doubt, those plans being allocating capital to converting proved undeveloped (PUD) locations at Garden Island Bay to proved developed reserves along with drilling activities at Live Oak Field, Pearsall, Bateman Lake Field and Leeville Field.

As it stands there are few investors who believe that DUNR will produce a favorable outcome regarding their debt restructuring and this has left shares in the company in a dismal slump. With so much out of DUNR’s control when it comes to this issue its hard to see where investors would have any kind of faith in a positive future.

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