Pinnacle Oilfield Services · PNOS
DEMO DATAUNDERWRITING ASSUMPTIONHOLDPinnacle Oilfield Services — Senior Secured Notes 8.00%
Proposed investment
Returns
| Base IRR (p=55%) | 7.2% | FAIL |
| Downside IRR (p=30%) | 4.1% | PASS |
| Severe downside IRR (p=15%) | 6.5% | |
| Probability-weighted IRR (of expected cash flows) | 6.2% | FAIL |
| MOIC base / downside / severe | 1.22x / 1.12x / 1.31x | |
| Required IRR (hurdle) | 12% | |
Credit
| Net leverage (FY2025A) | 2.0x | max 6.0x |
| Interest coverage (EBITDA / interest) | 4.54x | |
| Liquidity | $510M | |
| Covenant headroom (base, minimum) | n/a | min 15% |
| Credit score | 80 / 100 | Low |
| Next maturity | 2028 | |
Downside
| Recovery (downside / severe) | 100% / 100% |
| Loss given default (severe) | 0% |
| Default period (downside / severe) | none / FY2029E |
| Probability of default (weighted) | 15% |
| Expected loss | 0.0% |
| Recovery needed for MOIC 1.0x | 70% of face |
Key risks (largest first)
- Downside-case recovery of 100% falls short of the purchase price.
- Severe case produces a payment default in FY2029E.
- Severe-case valuation recovery of 100% is below the 101.5 purchase price: a 0% loss given default.
- Weakest credit-score factor: Revenue stability (0.0 of 8 points).
- Commodity price downturn
Key protections (strongest first)
- First-priority secured position on substantially all assets; 0% of recovery value is senior to us and 57% through our tranche.
- Coverage of 4.54x EBITDA / interest; EBITDA can fall 78% before coverage reaches 1.0x.
- Moderate leverage: net debt / EBITDA 2.0x.
- Liquidity of $510M (60% of total debt).
- Base-case refinancing tests pass for all 3 maturing tranche(s); 1 are repaid from cash.
Catalysts
- E&P budget announcements
- Natural-gas-directed activity
Diligence — 3 unresolved high-priority item(s)
Tracker →- Historical financials tied to filings — Issue IdentifiedDo model inputs reconcile to audited statements?
- Quality of earnings / EBITDA add-backs — Not StartedHow much of adjusted EBITDA is add-backs?
- Free cash flow conversion — Not StartedWhat is cash conversion after capex and working capital?
Investment thesis
Net leverage ~2x with a modern fleet; the secured notes stay money-good even in the severe case at current asset values. Cyclicality caps position size but the risk-reward vs. other energy credit is attractive.
The question: Does a 7.4% yield on a rank-1 secured claim compensate for 15% probability-weighted default risk and 0% severe-case loss?
Recommendation rationale — evidence from the model
HOLDHOLD (do not size yet): Base-case IRR clears hurdle (7.2% vs ≥ 12.0%); Expected-cash-flow IRR (probability-weighted) clears hurdle (6.2% vs ≥ 12.0%); Entry yield meets minimum (7.4% vs ≥ 9.0%).
| Test | Actual | Required | Weight | |
|---|---|---|---|---|
| ✗ | Base-case IRR clears hurdle | 7.2% | ≥ 12.0% | core |
| ✗ | Expected-cash-flow IRR (probability-weighted) clears hurdle | 6.2% | ≥ 12.0% | core |
| ✓ | Downside IRR stays above floor | 4.1% | ≥ 0.0% | core |
| ✓ | Downside recovery meets minimum (valuation waterfall) | 100.0% | ≥ 60.0% | core |
| ✓ | Base-case refinancing succeeds | PASS | PASS | core |
| ✗ | Entry yield meets minimum | 7.4% | ≥ 9.0% | secondary |
| ✓ | Net leverage within maximum | 2.0x | ≤ 6.0x | secondary |
| ✓ | Covenant headroom (base case, minimum) | n/m | ≥ 15.0% | secondary |
| ✗ | Principal protected in severe case (recovery ≥ price) | 100 vs 101.5 | recovery ≥ price | secondary |
| ✗ | No unresolved high-priority diligence | 3 open | 0 open | secondary |
Rule: PROCEED if all five core tests pass and ≤ 2 secondary tests fail; PASS if the base case and the downside both fail, or ≥ 3 core tests fail; otherwise HOLD. Thresholds (hurdle 12%, min downside IRR 0%, min yield 9.0%, max leverage 6.0x, min recovery 60%, min covenant headroom 15%) are configurable per case. The Excel Investment Summary tab implements the same rule by formula.
What would change my mind?
- EBITDA declines more than 78% from FY2025A (coverage < 1.0x) — or more than n/m (first covenant breaks).
- The entry price is above 89.9: the base case no longer earns the 12% hurdle (assumed price 101.5).
- Collateral / enterprise value falls more than 41% from the base-case valuation: the tranche starts to take losses.
- Market access weakens: base-case pro-forma coverage at refinancing is 4.91x vs the 1.20x test, at an assumed 8.5% refinancing rate — a higher spread or lower EBITDA flips the test.