C&J Energy Services, Ltd. (NYSE:CJES) Crashes Due To Unfavorable Debt Ratio

[[tagnumber 0]][[tagnumber 1]]C&J Energy Services, Ltd. (NYSE:CJES) was definitely among, if not, the biggest losers on the NYSE yesterday as the stock tumbled a whopping 57%. Why did this happen, though? Two main reasons come to mind and both lie in the company‘s Q1 2016 financial results, which just happened to be published the night before.[[tagnumber 2]] [[tagnumber 0]]First, the oil and gas service provider closed yet another quarter at a loss amounting to $3.65 per share, or $0.61 per share less accumulated asset impairment and severance costs. Given that the continually hostile commodity prices have inevitably left no company unscathed in this industry, CJES‘s Q1 loss hardly surprised anyone. What is more, the loss was even smaller than analysts had anticipated, but then again, the top line was also less than expected. So what was that bad that triggered such a massive selloff throughout the session yesterday, ultimately resulting in almost 20 million shares changing hands?[[tagnumber 2]] [[tagnumber 0]][[tagnumber 6]]A debt covenant breach, apparently. As mentioned by CEO Randy McMullen, Jr. himself, CJES could not maintain the minimum required debt to EBITDA ratio under the credit agreement governing the company‘s credit facilities. Sometimes a loan agreement would stipulate that the business maintain its debt load to a particular proportion to the EBITDA. Otherwise, the loan becomes due immediately. In C&J‘s case, however, the dark cloud comes with a silver lining because of the two–month extension provided by the creditors. If C&J succeeds in bringing this ratio to the desired level by May 31, no default will take place.[[tagnumber 2]] [[tagnumber 0]]So far, so good. However, how could a trader know for sure that CJES will actually be capable of taking advantage of this limited waiver? Considering the hard times its financials have been facing for the last few quarters, it is hard to think that anything other than waving magic wand will do, and that‘s what troubles investors right now. In the best–case scenario, CJES could regain what it lost in a single day. Otherwise, the company will default on its debt, which will trigger a deadly spiral with no end in sight.[[tagnumber 2]] [[tagnumber 0]]Having closed at $0.46 yesterday, CJES shares are up 7% to $0.49 shortly before the end of the current session.[[tagnumber 2]]