Exploring Opportunities in the Distressed Oil Patch

Exploring Opportunities in
the Distressed Oil Patch
Recent Developments in Energy Capital Markets,
Restructurings, and Bankruptcies in the Oil Patch
Moderator:
Brian Barnard – Haynes and Boone
Speakers:
Steve Pezanosky – Haynes and Boone
Adam Dunayer – Houlihan Lokey
Michael Cooper – Haynes and Boone
November 12, 2015
© 2015 Haynes and Boone, LLP
Introduction
Brian Barnard
Haynes and Boone, Fort Worth
© 2015 Haynes and Boone, LLP
2
CURRENT INDUSTRY TRENDS
• Growing consensus that commodity prices will stay
low for some time
• Bank regulators are pressuring senior energy lenders
to redline large parts of their loan portfolio, requiring
much larger bank reserves and rendering these loans
unprofitable
• Regulators are extending this pressure to traditional
second lien lenders who are bank affiliates
• Result: funding gap to be filled by non-bank lenders
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
3
CURRENT INDUSTRY TRENDS
•
$115.6 billion of PE
dedicated to new energy
deals and 67 energy
focused funds trying to
raise $29 billion more.
Including leverage,
energy funds have
$300 billion to spend*.
*Private-Equity Firms Plunge Back Into the Oil Patch,
Wall Street Journal, September 4, 2015.
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
4
OBJECTIVES OF OUR BORROWING BASE SURVEY
•
Haynes and Boone conducted surveys in
April and September 2015 that included executives at:
–
–
–
–
Financial institutions
Private equity firms
Independent producers
Professional services providers
•
The objective was to get a clear sense of what lenders,
borrowers and others were expecting regarding the spring
and fall 2015 borrowing base redeterminations in light of the
price uncertainty in the commodity market
•
The results that follow include a comparison of
responses from the spring and fall surveys
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
5
1. Who Responded
70
60
50
40
30
20
10
0
O&G lender
Spring
Fall
O&G producer borrower
Professional
services
provider
Other
Spring: 88 respondents
Fall: 182 respondents
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
6
2. What Percentage of Borrowers
will Experience a Decrease
Spring: average 68% expect a decrease.
Fall: average 79% expect a decrease.
45
No. of respondents
40
35
30
25
20
15
10
5
0
0% 10% 20% 30%
40%
Spring
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
50%
60%
70%
80%
90%
100%
Fall
7
3. Average Percentage Decrease
Spring: average of 25% decrease.
Fall: average of 39% decrease.
70
No. of respondents
60
50
40
30
20
10
0
0%
10% 20% 30% 40%
Spring
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
50%
60%
70%
80%
90%
100%
Fall
8
4. RESPONSES (SPRING SURVEY ONLY):
Last Spring, respondents expected that this Fall’s borrowing
bases would be 31% lower (compared with 39% now).
35
No. of respondents
30
25
20
15
10
5
0
10% 20%
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
30%
40%
50%
60%
70%
80%
90%
100%
9
5. RESPONSES (FALL SURVEY ONLY):
Responses
Response ratio
Negotiate an amendment /
extension with the lender
123
37%
Sell non-core assets
117
35%
Seek capital from hedge funds
or private equity funds
62
18%
Sell the company
6
2%
Restructure or declare
bankruptcy
25
7%
Other
4
1%
337*
100%
Total
*Although there were 182 respondents, up to two options could be selected.
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
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Record Debt Levels
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
11
BLACKTOBER???
•
Results of Fall borrowing base redeterminations
have not been as severe as anticipated (So Far)
•
E&P Companies with RBL’s have so far reported a
net reduction of 4.2%, approximately $1.23 billion in
the aggregate, in their credit lines (through October
28)
•
Are Banks kicking the can down the road (again)?
•
Several more redetermination announcements yet to
come could report more severe borrowing base
reductions
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
12
April 2015 Senior Loan Officer Opinion Survey
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
13
Assuming that economic activity progress in line with consensus forecasts, and energy commodity
prices evolve in line with current future prices, what is your outlook for delinquencies and charge –
offs on your bank’s loans to firms in the oil and natural gas drilling/extractions sector over the
remainder of 2015?
70
58.8%
60
50
45%
45%
39.2%
40
Selected Large Banks
30
Selected Branches and Agencies of Foreign
Banks
20
10%
10
2%
0
Loan quality is Loan quality is Loan quality is Loan quality is Loan quality is
likely to improve likely to improve likely to remain
likely to
likely to
substantially
somewhat
around current
deteriorate
deteriorate
levels
somewhat
substantially
* For this question, 1 respondent from selected branches and agencies of foreign banks and 21 respondents from selected large banks
answered, “My bank does not hold loans to firms in the oil and natural gas drilling/extraction sector.”
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
Source: April 2015 Senior Loan Officer Opinion Survey, published May 4, 2015, by
the Board of Governors of the Federal Reserve System of the United States.
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Please indicate how important each of the following actions are in your bank’s efforts to mitigate risks of loan
losses from loans made to firms in the oil and natural gas drilling/extraction sector. (Please rate each possible
action using the following scale: 1 = not important, 2 = somewhat important, 3 = very important).
•
Tightening underwriting policies on new loans or lines of credit made to firms
in this sector
60
55%
50
41.2%
40
29.4%
30
30%
29.4%
Not Important
Somewhat Important
Very Important
20
15%
10
0
Selected Large Banks in the U.S.
70.6%
Selected Branches and Agencies of Foreign
Banks in the U.S.
85%
Source: April 2015 Senior Loan Officer Opinion Survey, published May 4, 2015, by
the Board of Governors of the Federal Reserve System of the United States.
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
15
Please indicate how important each of the following actions are in your bank’s efforts to mitigate risks of loan
losses from loans made to firms in the oil and natural gas drilling/extraction sector. (Please rate each possible
action using the following scale: 1 = not important, 2 = somewhat important, 3 = very important).
•
Enforcing material adverse change clauses or other convenants to limit draws
on existing credit lines to firm in this sector
60
51%
50
40%
39.2%
40
40%
Not Important
30
Somewhat Important
20%
20
9.8%
10
0
Very Important
Selected Large Banks in the U.S.
49%
Selected Branches and Agencies of Foreign
Banks in the U.S.
60%
Source: April 2015 Senior Loan Officer Opinion Survey, published May 4, 2015, by
the Board of Governors of the Federal Reserve System of the United States.
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
16
Please indicate how important each of the following actions are in your bank’s efforts to mitigate risks of loan
losses from loans made to firms in the oil and natural gas drilling/extraction sector. (Please rate each possible
action using the following scale: 1 = not important, 2 = somewhat important, 3 = very important).
•
Reducing the size of existing credit lines to firms in this sector
60
54.9%
50
45%
40%
40
Not Important
30
20
Somewhat Important
25.5%
Very Important
19.6%
15%
10
0
Selected Large Banks in the U.S.
80.4%
Selected Branches and Agencies of Foreign
Banks in the U.S.
85%
Source: April 2015 Senior Loan Officer Opinion Survey, published May 4, 2015, by
the Board of Governors of the Federal Reserve System of the United States.
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
17
Please indicate how important each of the following actions are in your bank’s efforts to mitigate risks of loan
losses from loans made to firms in the oil and natural gas drilling/extraction sector. (Please rate each possible
action using the following scale: 1 = not important, 2 = somewhat important, 3 = very important).
•
Restructuring outstanding loans to make them more robust to the revised
outlook for energy prices
60
52.9%
50
40%
40
29.4%
30
20
30%
30%
Not Important
Somewhat Important
Very Important
17.6%
10
0
Selected Large Banks in the U.S.
82.3%
Selected Branches and Agencies of Foreign Banks in
the U.S.
60 %
Source: April 2015 Senior Loan Officer Opinion Survey, published May 4, 2015, by
the Board of Governors of the Federal Reserve System of the United States.
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
18
Please indicate how important each of the following actions are in your bank’s efforts to mitigate risks of loan
losses from loans made to firms in the oil and natural gas drilling/extraction sector. (Please rate each possible
action using the following scale: 1 = not important, 2 = somewhat important, 3 = very important).
•
Requiring additional collateral to better secure loans or credit lines to firms in
this sector
60
54.9%
50
45%
40
30
35%
29.4%
Not Important
Somewhat Important
20%
20
Very Important
15.7%
10
0
Selected Large Banks in the U.S.
70.6%
Selected Branches and Agencies of Foreign Banks
in the U.S.
65%
Source: April 2015 Senior Loan Officer Opinion Survey, published May 4, 2015, by
the Board of Governors of the Federal Reserve System of the United States.
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
19
Please indicate how important each of the following actions are in your bank’s efforts to mitigate risks of loan
losses from loans made to firms in the oil and natural gas drilling/extraction sector. (Please rate each possible
action using the following scale: 1 = not important, 2 = somewhat important, 3 = very important).
•
Tightening underwriting policies on new loans or credit lines made to firms in
other sectors
80
70.6%
70%
70
60
50
Not Important
40
Somewhat Important
30%
30
19.6%
20
9.8%
10
0
Very Important
Selected Large Banks in the U.S.
29.4%
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
Selected Branches and Agencies of Foreign Banks in
the U.S.
30%
20
WELLS ARE RESPONDINGDECREASED PRODUCTION
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
21
Bankruptcy/Restructuring
Landscape for Energy Companies
Stephen M. Pezanosky
Haynes and Boone, Fort Worth
Adam Dunayer
Houlihan Lokey, Dallas
Michael Cooper
Haynes and Boone, Fort Worth/Dallas
© 2015 Haynes and Boone, LLP
22
2015 Cumulative U.S. Energy Bankruptcy Filings
Miller,
RAAM
35
Samson
30
American Standard,
Black Elk Energy
25
Filings
20
Sabine, Milagro
Saratoga
Duer Wagner, Resources
American Eagle
15
Dune, Quicksilver, BPZ Resources
10
5
WBH Energy Partners
Ivanhoe
January
February
ERG Resources
0
March
April
May
June
July
August
September * October
© 2015 Haynes and Boone, LLP
*Includes information through 10/30/2015
23
2015 Cumulative E&P Secured and Unsecured Debt - $12.5 Billion
$14,000,000,000.00
Samson
$12,000,000,000.00
$10,000,000,000.00
American Standard, Black Elk Energy
Milagro, Sabine
Secured and Unsecured Debt
$8,000,000,000.00
$6,000,000,000.00
Dune, Quicksilver
$4,000,000,000.00
$2,000,000,000.00
WBH Energy Partners
Ivanhoe
January
February
Duer Wagner,
ERG American Eagle
Resources
Saratoga Resources
$‐
March
April
May
June
July
August * September
© 2015 Haynes and Boone, LLP
*Includes information through 10/30/2015
24
2015 Cumulative E&P Secured Debt - $6.5 Billion
$7,000,000,000.00
Samson
$6,000,000,000.00
American Standard, Black Elk Energy
$5,000,000,000.00
Milagro, Sabine
Secured Debt
$4,000,000,000.00
$3,000,000,000.00
Saratoga
Duer Wagner, Resources
American Eagle
ERG Resources
$2,000,000,000.00
$1,000,000,000.00
Dune, Quicksilver
WBH Energy Partners
Ivanhoe
January
February
$‐
March
April
May
June
July
August
*September
© 2015 Haynes and Boone, LLP
*Includes information through 10/30/2015
25
2015 Cumulative E&P Unsecured Debt - $6 Billion
$7,000,000,000.00
Samson
$6,000,000,000.00
$5,000,000,000.00
American Standard, Black Elk Energy
Milagro, Sabine
Unsecured Debt
$4,000,000,000.00
$3,000,000,000.00
ERG Dune, Quicksilver Resources
$2,000,000,000.00
$1,000,000,000.00
WBH Energy
Partners
Ivanhoe
January
February
Saratoga Resources
Duer Wagner,
American Eagle
$‐
March
April
May
June
July
August
*September
© 2015 Haynes and Boone, LLP
*Includes information through 10/30/2015
26
SECOND LIEN DEBT PROMINENCE IN RECENT FILINGS
$1,200
$1,000
Debt Filing (Millions)
$1,000
$800
$825
$700
$600
$400
$200
$250
$238
$0
Sabine Oil &
Gas
First Lien Debt
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
Milagro Oil &
Gas
Quicksilver
Resources
Samson
Resources
RAAM Global
Energy
Second Lien Debt
27
HYPOTHETICAL E&P CASE STUDY
•
Capital Structure
First Lien Debt
Second Lien Debt
Total Secured Debt
$50 MM
$20 MM
Unsecured/Trade Debt
•
$70 MM
$15 MM
Collateral Coverage After BB Re-Set
Value of Oil and Gas Assets
$50 MM
Collateral Coverage (90% of value) $45 MM
• Starting point for Chapter 11
– First Lien adequately covered
– Second Lien and Trade Debt underwater
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
28
HYPOTHETICAL E&P CASE STUDY
•
Company Loses Borrowing Availability Under RBL
– Lender Declares Covenant Default
– PANIC!!!
– Short-term Forbearance While Company Seeks New Capital
•
Company Seeks to Raise New Capital
– Engages Investment Banker
– Looks for Re-Financing or New Equity
• Terms are VERY EXPENSIVE!
– Looks to Sell Non-Core Assets
• Prices are TOO LOW!
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
29
HYPOTHETICAL E&P CASE STUDY
•
Company in Denial
–
–
–
–
–
–
•
Refuses to Consider Realistic Options
Mind Set Stuck in 2014
Liquidity Tightens
Trade Debt Gets Stretched
M&M Liens Filed
Proceeds Suspended
Lender Loses Patience
– Forbearance Expires
– Company Forced Into Chapter 11
– Lender Forces Company into Sale Process
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
30
HYPOTHETICAL E&P CASE STUDY
•
WHERE ARE YOU IN THIS EQUATION?
–
–
–
–
–
Distressed Company / Old Equity?
Buyer of Distressed Assets?
Equity Investor?
Mezzanine Lender?
Debt Trader?
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
31
DISTRESSED ASSET SALES
•
VERY Difficult Market for Raising New Equity or Debt
– New equity investors would rather just buy assets
– New debt is difficult because collateral values are depressed
•
Distressed Asset Sales have become the norm
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
32
THE DIFFERENCES IN ENERGY COMPANY
BANKRUPTCIES
•
Oilfield Service Bankruptcies -- Equipment Intensive
– Liquidation Value vs. Enterprise Value
• Worth more dead than alive??
– Highly Dependent on E&P Market Recovery – 6-12 months after $60 oil
– Can business sustain itself from cash perspective?
• EBITDA levels
• Cap Ex Needs
• Balance Sheet Needs (interest and principle)
– ABL Lenders and Equipment Lessors Have Big Stick
– What do Lenders Want to Do?
• PIK interest
• Debt for Equity Conversion
• Liquidate
– What Can Old Equity Do?
– What Can Management Do?
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
33
THE DIFFERENCES IN ENERGY COMPANY
BANKRUPTCIES
•
E&P Bankruptcies are a Different Breed
– Not All Assets Subject to Senior Lender’s Liens (too cumbersome)
• Gives other creditors a seat at the table
– Second Liens Sandwiched Between RBL and Unsecured/Trade
• In declining price market, second lien maybe out of the money
• Creates costly, litigious relationship between second liens and trade
debt
•
E&P Companies have Unconventional Assets
– Oil and Gas Lease is not a “Lease” (in some jurisdictions)
– State Laws Vary Materially on Key Issues
• Operating agreements
• Stakeholder rights – royalty, vendors, operator, VPP
– Early Stage Liquidity Requirements
– Unproven Reserves Given Little or No Value
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
34
BANKRUPTCY SALES
•
Why Implement Sales / Acquisitions in Chapter 11?
–
–
–
–
–
–
–
–
Section 363 Sales -- Timeline and Process
Stalking Horse Protections
Credit Bidding
Assignment of Contracts in Bankruptcy
Treatment of O&G Contracts in Bankruptcy
Diligence Issues
Purchase Agreement Negotiation
Post-Acquisition Issues
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
35
LIGHTNING ROUND: CURRENT CASE STATUS
•
Quicksilver Resources (filed March, Del.)
•
Sabine Oil & Gas (filed July, S.D.N.Y.)
•
Milagro Oil & Gas (filed July, Del.)
•
Samson Resources (filed September, Del.)
•
RAAM Global Energy (filed October, S.D. Tex.)
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
36
Questions?
© 2015 Haynes and Boone, LLP
37
SPEAKERS
Brian Barnard
Partner
Haynes and Boone
Fort Worth
817.347.6605
brian.barnard@
haynesboone.com
© 2015 Haynes and Boone, LLP
© 2015 Haynes and Boone, LLP
Steve
Pezanosky
Partner
Haynes and Boone
Fort Worth/Dallas
817.347.6601
stephen.pezanosky@
haynesboone.com
Adam Dunayer
Michael Cooper
Managing Director
Houlihan Lokey
Dallas
Counsel
Haynes and Boone
Fort Worth/Dallas/Houston
214.220.8483
214.651.5465
[email protected]
michael.cooper@
haynesboone.com
38
© 2015 Haynes and Boone, LLP