Energy Firms Forbes, Memorial Plan to Start 2017 With Bankruptcy

  • Bonanza joins Forbes and Memorial on Friday to outline plans
  • About 24 listed companies have filed for bankruptcy in 2016

In the dying breaths of the year, the commodity price plunge claimed its latest victims as three energy companies outlined bankruptcy filing plans.

Forbes Energy Services Ltd., Bonanza Creek Energy Inc. and Memorial Production Partners LP will use the U.S. courts to restructure their borrowings, each said Friday in regulatory filings. Bonanza and Memorial will give current shareholders some recovery of their investments, while Forbes said it plans to allocate them nothing and cede control to senior bondholders.

About 24 publicly traded U.S. companies related to oil and gas filed for bankruptcy in 2016, impacting over $47 billion in debt, according to Spencer Cutter of Bloomberg Intelligence. The industry is burdened by borrowings that seemed prudent when oil was topping $100 barrel, but aren’t sustainable with prices now at about half that level.

“You can prepare for rainy days but few people can prepare for a flood,” said Lewis Grimm, a New York-based leveraged finance partner at law firm Jones Day. “The problem is that some oil and gas companies had a liquidity buffer at the beginning but the cash drain kept on going and going as prices remained low and the hedges rolled off.”

Crude was trading at about $107 a barrel in mid-2014 when the selloff began, bottoming out in February at about $26. Oil prices have hovered around $50 in recent weeks, helped by the Organization of the Petroleum Exporting Countries’ historic deal with other producers in November to cut oil supply starting January.

Bonanza’s Filing

The recovery in energy prices slowed the reorganizations of some companies in 2016, sparking fights in cases like Sabine Oil & Gas Corp. and BreitBurn Energy Partners LP over how the correspondent rise in the company’s value would be shared among creditor groups. Bonanza, Memorial and Forbes all plan to make a quick trip through the courts after already having drawn up rough plans and winning some creditor support, but it remains to be seen if fluctuating prices will complicate matters. 

Bonanza, based in Denver, said it will file for bankruptcy by Jan. 5 to carry out a restructuring that would cut $850 million in debt. The company, created at the “bottom of the commodity cycle” in 1999, focuses on horizontal drilling and fracturing to extract oil and gas in Colorado and Arkansas.

In addition to swapping debt for equity in the reorganized company, its plan calls for an infusion of $200 million in new capital and changes in the company’s oil sale and purchase agreement with pipeline counterparties. Senior noteholders will get 95.5 percent of the equity in the new company, and the remainder will go to current shareholders under certain conditions.

Memorial, Forbes

Memorial plans to file by Jan. 16 after reaching an agreement with its creditors on a restructuring that would see bondholders own 98 percent of common equity interest in the reorganized company. The Houston-based firm, which skipped a bond coupon payment in November, will provide its partners with recovery in the form of 2 percent of the reorganized company’s equity and five-year warrants to acquire an additional 8 percent, according to its statement. It also monetized hedges on its oil and gas production to repay $190 million on a revolving credit facility.

Under Forbes’ Chapter 11 plan, to be filed with a bankruptcy court in Texas by Jan. 23, shareholders will be wiped out and control of the oilfield services contractor given to senior noteholders, according to its filing. Terms call for the senior holders to get $20 million in cash and 100 percent of the new common stock, not counting a management incentive plan that could equal a 12.5 percent stake, Forbes said.

They join firms such as Energy XXI Ltd. and C&J Energy Services Ltd. which have sought resolution in the bankruptcy courts. More could face similar issues if oil prices remain low, according to Grimm.

“Eventually some of the companies couldn’t handle it. They ran out of rainy-day resources,” he said.

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