- Stakeholders seek higher valuations in drillers’ bankruptcies
- Strategy can backfire when legal fees eat into recoveries
For most investors, the rebound in energy prices is reason to celebrate. For others, it’s cause to litigate.
With U.S. crude almost doubling in price since February and natural gas gaining about 38 percent just since May 26, stakeholders in at least three bankrupt energy companies are contending that corporate assets have risen so much in value that they deserve a bigger payout.
Sabine Oil & Gas Corp.’s unsecured creditors and note holders of Forest Oil Co., which merged with Sabine in 2014, filed a report last week seeking a jump in recoveries. Shareholders of bankrupt driller Penn Virginia Corp. questioned current valuations, while Ultra Petroleum Corp. shareholders, who are the first to be wiped out in a bankruptcy, said earlier this month that they are “very likely ‘in the money,’” according to a letter seen by Bloomberg News.
“There are gigantic battles going on over valuation in Houston right now,” said Thomas McNulty of Houston-based Navigant Consulting Inc., which advises creditors and borrowers on valuation assessments. “This will cause delays because a plan can be thrown away after weeks of negotiations and they have to start from scratch.”
Delays can end up hurting stakeholders, McNulty said, because legal fees eat into what they can recover. At some point, he said, investors have to put a stop to the legal challenges.
In some cases, fat chance of that.
“For the investors who are getting nothing, there’s nothing to lose,” said Jack Butler, chief executive officer of Birch Lake Holdings, an investment and advisory firm. “They’re dragging out the process hoping they might get something out of it.”
Sabine’s $350 million of 9.75 percent senior unsecured bonds maturing 2017 last traded at 2 cents on the dollar on June 9, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
In the opinion of Sabine creditors, the company, which filed for bankruptcy last July, is ignoring the recent increase in oil and gas prices to “artificially inflate” the amount paid to the secured lenders at the expense of junior ones. Sabine representatives didn’t respond to requests for comment.
Ultra shareholders said that, given the gas-price rebound, the company’s earnings projection for the year has gone up by $130 million to $430 million, which suggests “equity could well be worth close to $3 billion,” according to a letter they sent the company. Sandi Kraemer, an Ultra spokeswoman, declined to comment.
Penn Virginia’s ad hoc committee of shareholders is questioning the current valuation of $192 million to $290 million under the driller’s proposed reorganization plan. In court papers filed June 14, they asked where $2.7 billion of value went between February 2015 and the bankruptcy filing.
“The short answer is ‘nowhere’ -- the proved and probable reserves that were the basis of the debtors’ $3 billion valuation are still in the ground waiting for extraction,” the committee said. The company valued itself at about $3 billion in a February press release. That was based on oil at $60 a barrel. A Penn Virginia spokesman declined to comment.
At the current energy prices, creditors that are getting paid ahead of both Ultra and Penn Virginia’s shareholders are still impaired. Ultra’s $450 million of 5.75 percent senior unsecured notes maturing in 2018 last traded at 65 cents on the dollar at 9:49 a.m. in New York Friday, while Penn Virginia’s $300 million of 7.25 percent senior unsecured debt maturing in 2019 most recently changed hands at 38.5 cents on the dollar Thursday, Trace data show.
Stakeholders demanding more is a relatively new phenomenon. Recently, bankrupt companies have had a hard time giving their assets away. In May 2015, American Eagle Energy Corp. filed for bankruptcy with debts of $215 million. Its properties fetched $45 million in October. BPZ Resources Inc. owed $275.2 million; its assets sold for about $9 million. And ERG Resources opened an auction with a minimum bid of $250 million. There were no takers.
U.S. oil lost three-quarters of its value to $26.21 a barrel between June 2014 and February 2016, plunging a slew of drillers into bankruptcy, before bouncing back to the $50-a-barrel range this week. Natural gas fell 73 percent to $1.639 per million British thermal units from February 2014 to March 2016 before rebounding to as much as $2.768 this week.
When it comes to bankruptcies, price jumps are unusual, said Bill Rochelle of the American Bankruptcy Institute, a bankruptcy attorney for almost 45 years.
“In bankruptcies, it’s not often that values rise so quickly,” Rochelle said. “More often, bankruptcies involve declining prices.”
More typical are disputes over declining prices. That’s what’s holding up Energy Transfer Equity LP’s bid to merge with pipeline competitor Williams Cos. The price slump wiped out almost half the value of both companies, making the economics of the deal questionable.
In the third quarter, crude is expected to hover around $44.80 a barrel and natural gas will be around $2.37 per million British thermal units, according to 11 analysts polled by Bloomberg.
In the meantime, stakeholders will continue to fight it out with companies in bankruptcy to scrape as much value as they can for themselves.
“If you’re in energy bankruptcy cases and you’re planning to go to Italy for the summer, you’re not going,” said Jeff Schwartz, co-chair of restructuring and business bankruptcy group at law firm Robins Kaplan. “Your summer plans will be ruined.”