Flying J's Descent

Financial plight indicative of pressures facing refiners, says Journal

Published in CSP Daily News

OGDEN, Utah -- Flying J Inc., one of the 20 biggest private companies in the country, is among the first in the energy sector to file for bankruptcy, said The Wall Street Journal. As reported in CSP Daily News, Flying J Inc. filed Monday for reorganization, citing the collapse in oil prices and tight credit markets as the roots of its financial troubles.

Flying J's plight is indicative of the pressures facing other refiners, which are operating under very tight credit conditions at a time when their profits are battered by weak demand for gasoline, said [image-nocss] the report. After several profitable years, some companies have strong balance sheets and likely will ride through the storm, Jacques Rousseau, an analyst with Back Bay Research, told the newspaper. But if the economy continues to slump and credit remains tight, more companies, particularly those burdened with big debts, could file for bankruptcy as well.

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"There may be some that are close," Peter Fasullo, co-owner of EnVantage Inc., an energy consultancy firm based in Houston, also told the paper.

Flying J's liquidity problems stem from loans that were secured with oil and refined product inventories, the company's CEO J. Phillip Adams said. The plunge in oil prices, which fell more than 70% from record-high levels in July, lowered the value of their loan collateral and triggered additional payments, or margin calls, that led the company's refining arm Friday to default on a $200 million loan provided by a group of lenders led by Bank of America Corp.

A day later, the company's distribution arm defaulted on a $120 million loan provided by a group of lenders led by Merrill Lynch Capital Corp. On Monday, Newfield Exploration Co., an oil producer, said it ended a crude oil sales contract with Flying J's refining arm because it failed to pay.

Adams said that although Flying J has profitable assets, it was unable to sell them or secure other sources of credit in time to avoid the defaults.

Zion Bank, which is owed approximately $85.6 million, is Flying J.'s largest unsecured creditor, according to court filings cited by the Journal. ConocoPhillips, owed $69.4 million, is second on the list of unsecured creditors. Newfield said it was owed $15 million.

Shares of Zions Bancorp fell Tuesday, a day after it was revealed the regional bank had $85.6 million in loan exposure to Flying J's bankruptcy, said Forbes.

Citi Investment Research analyst Greg Ketron in a research note estimated Zions exposure at between $65 million and $75 million. That amount will have to be written down, which will lead the bank to post a fourth-quarter loss. Ketron cut his fourth-quarter estimate to a loss of 22 cents per share from a previous forecast for earnings of 41 cents per share. Analysts polled by Thomson Reuters, on average, forecast a loss of 12 cents per share for the fourth quarter.

Overall, Zions has been able to minimize loss exposure through conservative lending, Ketron wrote in the note. But, as the economy worsens, losses are likely to mount, especially among loans with lower levels of collateral such as commercial and industrial loans.