Oil & Gas Financing and Investment Series

Transcription

1 Oil & Gas Financing and Investment Series Recent Developments in Second Lien Financings, Restructurings, and Bankruptcies in the Oil Patch Introduction/Moderator: Jeff Nichols Borrowing Base Update: Speakers: Buddy Clark Gilbert D. Porter Robert D. Albergotti Ian Peck September 17, 2015

2 Introduction Jeff Nichols Partner, Houston

3 ANALYSTS PROJECTIONS Source: Market Update: Oil and Gas August 2015, KPMG 3

4 REVISIONS DOWNWARD Source: Macquarie Capital (USA), Macquarie Estimates, September

5 FUTURES PRICE* Date Oil Gas Oct Oct Oct Oct Oct *As of September 15, 2015 at 9:00 am CST 5

6 BUT FUTURES PRICES ARE RARELY RIGHT Source: Tudor, Pickering, Holt & Co 6

7 PRODUCTION DECLINES (?) Source: US Production a New Sheriff In Town, September 14, 2015, Tudor Pickering Holt & Co. 7

8 PRODUCTION DECLINES (?) Natural gas production from the seven largest U.S. shale deposits will drop for a fourth straight month in October to average billion cubic feet a day, the lowest since March, based on an Energy Information Administration forecast released Monday. That s the longest streak of monthly declines in government data going back to 2007* The number of drilled but uncompleted wells jumped almost 50 percent in January through June from the same period a year earlier* *America's Shale Gas Supply Is Caught in its Longest-Ever Decline, September 15,

9 SUPPLY AND DEMAND MODEL: EIA & TPH 9

10 BUT WILL THE IMPACT OF THE REBALANCE BE ENOUGH?* Date Oil Gas Oct Oct Oct Oct Oct *As of September 15, 2015 at 9:00 am CST 10

11 ENERGY EQUIVALENT PRICING MODEL 11

12 WHAT ABOUT GAS? 12

13 Borrowing Base Report Buddy Clark Partner, Houston

14 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 bank affiliates that have been second lien lenders Result: funding gap to be filled by non-bank lenders 14

15 CURRENT INDUSTRY TRENDS Borrowing base redeterminations this fall could force producers to: Cut drilling even more sharply Seek additional equity Restructure, or File for bankruptcy 15

16 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,

17 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 17

18 1. QUESTION: Which of these best describes you? Oil and gas lender Oil and gas producer borrower Professional services provider Other 18

19 1. RESPONSES: Spring O&G lender O&G producer - borrower Fall Professional services provider Other Spring: 88 respondents Fall: 182 respondents 19

20 2. QUESTION: What percentage of borrowers do you anticipate will see a decrease in their borrowing base redeterminations this Spring/Fall? 20

21 2. RESPONSES: On average 68% of respondents expected a decrease in the Spring and 79% in the Fall No. of respondents % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Spring Fall 21

22 3. QUESTION: What percentage of borrowers do you anticipate will see a decrease in their borrowing base redeterminations this Spring/Fall? 22

23 3. RESPONSES: Last Spring, respondents expected on average a 25% decrease and this Fall an average of 39% decrease No. of respondents % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Spring Fall 23

24 4. QUESTION (SPRING SURVEY ONLY): How much below last Spring did respondents expect borrowing bases in the Fall to be? 24

25 4. RESPONSES (SPRING SURVEY ONLY): Last Spring, respondents expected that this Fall s borrowing bases would be 31% lower No. of respondents % 20% 30% 40% 50% 60% 70% 80% 90% 100% 25

26 5. QUESTION (FALL SURVEY ONLY): Which one or two of the following options below do you think will be the most likely path that lenders and borrowers will take when faced with a borrowing base deficiency? 26

27 5. RESPONSES (FALL SURVEY ONLY): Responses Response ratio Negotiate an amendment / extension with the lender % Sell non-core assets % 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% Total 337* 100% *Although there were 182 respondents, up to two options could be selected. 27

28 Second Lien Financing Gilbert D. Porter Partner, New York

29 THE OIL AND GAS FINANCING SPECTRUM Reserves PDP Capital source Senior Conforming Based on cash flow Looser covenants Based on financial covenants Title important Yield less than 5% Stretch/Second Lien PDNP PUD Partially based on cash Partially based on financial covenants Cash flow and financial covenants less important Yield 10 to?% Yield 8 to 12% No equity kicker Title very important Mezzanine Equity Kicker Title extremely important Probable And Possible Early Stage Management Upside Equity High Returns Long Term 29

30 SECOND LIEN TRENDS Popular alternative to mezzanine financing for borrowers: Less expensive No equity dilution Less restrictive call periods Covenant-lite structure Available from commercial banks (?) and institutional lenders as well as funds Popularized in Deal volume contracted during Restored to near record volume in Q Starting Q4 still active, but with significant market developments During last 12 months market has maintained some differentiation between the corporate bond market and the privately-negotiated market for Second Lien debt 30

31 SECOND LIEN STRUCTURE Lien Subordination NOT payment subordination - senior status makes it acceptable to conventional senior lending market Subordination Only Applies to Proceeds of Collateral Payments may be made (and required to be made) by Issuer/Borrower, even during Default, unless they are proceeds of enforcement against collateral Most effective way of First Lien to cut off payments to Second Lien is to commence foreclosure Otherwise, Second Lien is pari passu with First Lien Debt and other senior debt May Require Waiver of Debt / Negative Pledge Covenants First Lien debt typically willing to waive covenants, since proceeds will go to repaying some First Lien debt and improving the financial capability of the Borrower Unsecured debt not likely to agree 31

32 LIEN SUBORDINATION TERMS Full Lien Subordination Intention to maintain identity of collateral between First Lien and Second Lien Standstill on Second Lien enforcement during default Typically 180 days Priority of First Lien continues notwithstanding Agreement by Second Lien lenders not to challenge validity and priority of First Lien Pay-over of moneys collected by Second Lien lenders from collateral until payoff of First Lien lenders Cooperation / no-contest during bankruptcy of Issuer/Borrower Limited ability of First Lien lenders to release collateral free from both First Lien and Second Lien 32

33 LIEN SUBORDINATION TERMS (CONT D) Documented Through Intercreditor Agreement Borrower is party as well Preserves relative priorities irrespective of filing dates and other factors Provides assurances to all sides 33

34 PROTECTION OF SECOND LIEN LENDERS Covenant Protection Default under Second Lien credit agreement will not preempt lien subordination, but still not attractive to First Lien lenders Intercreditor Protection Limit on First Lien debt Borrowing Base definition Issue of compliance during declining Borrowing Base Possible limits on other economic terms during amendment Purchase option 34

35 MARKET DEVELOPMENTS Corporate Bond Market Public offering Yield about bps above 1st Lien, and rising Conventional covenant-lite structure First-Lien friendly intercreditor terms Limited availability to stronger borrowers/issuers Privately-Negotiated Second Lien Debt Sometimes coupled with equity investment All-in debt yield of between 9-12%, and rising Strict covenant controls (almost comparable to 1st-Lien) More-aggressive mandatory prepayment terms Highly negotiated intercreditor agreement stricter limits on First Lien debt size stricter limits on renegotiated First Lien economic terms 3rd-priority for non-conforming debt? 35

36 UP-TIERING Company issues new secured notes in exchange for old outstanding unsecured notes Existing noteholders exchange their notes at a discount to obtain new secured notes Typical transaction involves exchanging unsecured notes for Second Lien notes Second Lien notes have lower coupon rate than unsecured notes Issuer benefits from reduction in interest rates and reduction in outstanding total debt 36

37 UP-TIERING (CONT D) Issues Compliance with debt covenants First Lien typically happy to consent Need to comply with Unsecured Debt covenants (Debt / Negative Pledge) Exchange is done on a non-pro-rata basis Less attractive to some noteholders if full exchange is made Need to avoid tender offer issues - Privately negotiated exchanges - All exchanges on like terms - Limited number of exchange counterparties 37

38 UP-TIERING (CONT D) START Total debt = $250million FINISH Total debt = $210million FIRST LIEN SECURED NOTES 7% $50 million $25 SECOND LIEN SECURED NOTES $25 $60 $85 UNSECURED NOTES 10.75% $200 million $100 38

39 Bankruptcy Risks for Second Lien Creditors Ian Peck Partner, Dallas Robert D. Albergotti Senior Counsel, Dallas

40 2015 ENERGY BANKRUPTCY FILINGS Hercules Offshore, Alpha Natural Resources Filings Cal Dive, Dune, Quicksilver, BPZ Energy ERG Resources, Xinergy Patriot Coal, Duer Wagner Saratoga Resources, Boomerang Tube Sabine, Milagro, Walter Energy, Signal 0 January February March April May June July August 40

41 SECOND LIEN DEBT PROMINENCE IN RECENT FILINGS $1,200 $1,000 $1,000 Debt Filing (Millions) $800 $600 $400 $700 $825 $200 $250 $0 Sabine Oil & Gas Milagro Oil & Gas Quicksilver Resources Samson Resources First Lien Debt Second Lien Debt 41

42 THE DIFFERENCES IN E&P BANKRUPTCIES E&P bankruptcies are different unsecured debt in the money Thousands of individual assets all not subject to perfected liens Second liens layered between RBL and high yield unsecured Declining commodity prices, second lien partially out of the money Second lien v. In the money high yield = costly, litigious and potentially long duration cases E&P companies have unique or unconventional assets Lease is not a lease (in some jurisdictions) State laws vary materially on issues that can affect value and outcome Operating agreements Stakeholder rights royalty, vendors, operator, VPP Early stage liquidity requirements Unproven assets difficult to value Hedges 42

43 HYPOTHETICAL E&P CASE STUDY E&P Borrower with reserve based loan requiring pledge of 90% of asset value Capital Structure First Lien Debt Second Lien Debt Total Secured Debt Unsecured Debt $500 MM $200 MM $700 MM $150 MM Collateral Coverage Value of Oil and Gas Assets $600 MM Collateral Coverage (90% of value) $540 MM Starting point for Chapter 11 First Lien adequately covered Second Lien $160 MM underwater $40 MM available to satisfy Second Lien, cover costs of bankruptcy and treat unsecured debt 43

44 POTENTIAL EROSION OF 2 ND LIEN COLLATERAL DIP Financing / Use of Cash Collateral Priming liens, adequate protection First-Day Motions to pay secured creditors Royalties Working interests Critical oilfield service vendor payments Estate Professional Fees Counsel, financial advisors, and investment bankers for Debtor, secured lenders, and official and unofficial committees Success fee issues Case duration in free-fall cases 44

45 ENFORCEMENT OF INTERCREDITOR AGREEMENTS Bankruptcy Code Section Intercreditor / Subordination Agreements generally enforceable Examples of potential impact: Dune Energy - Enforcing turnover of shared collateral proceeds - Circumvention of second lienholders by sharing of first lien creditors distributions with unsecured creditors Dura Automotive - Enforced X-Clause - Subordinated noteholders not entitled to distribution of stock under Plan 45

46 PRE-BANKRUPTCY ANALYSIS Lien Coverage Review extent of unencumbered assets Consider gaps as leverage for statutory lien and unsecured creditors Perfection and Priority Disputes Carefully consider applicable state law (ex. Sem-Crude) Relation-back doctrine for M&M lienholders Borrowing base redeterminations and resultant lien grants General Motors J.P. Morgan s lien invalidated for $1.5B loan Intent irrelevant Improvement of position Any perceived improvement will be scrutinized (ex. Sabine) as potential preference or fraudulent transfer 46

47 ALTERNATIVE FORMS OF FINANCING Borrower conveys property interests via ORI, VPP, NPI ORI: interest in production free of expense VPP ( Term ORI ): interest in limited fixed quantity of product, free of expense NPI: share of production burdened by certain expenses Bankruptcy risk of recharacterization as: Secured claim (subject to cram down) Unsecured claim (subject to discharge) Executory contract (subject to rejection) Fraudulent transfer (subject to avoidance) Example: ATP Oil & Gas $500MM in Term ORIs LOEs far exceeded ATP s remaining share of production Ongoing litigation regarding characterization of ORRIs 47

48 Questions?

49 CLE CREDIT Texas: This course has been approved for Minimum Continuing Legal Education credit by the State Bar of Texas Committee on MCLE in the amount of 1.0 credit hours. New York: This transitional program has been approved in accordance with the requirements of the New York State CLE Board for a maximum of 1.0 credit hour, of which 1.0 credit hour can be applied toward the Areas of Professional Practice requirement. California: This activity is approved for MCLE credit by the State Bar of California in the amount of 1.0 credit hours. 49

50 THE HAYNES AND BOONE PROFESSIONALS Buddy Clark Partner, Houston Jeff Nichols Partner, Houston Gilbert D. Porter Partner, New York Ian Peck Partner, Dallas Robert Albergotti Senior Counsel, Dallas haynesboone.com haynesboone.com haynesboone.com haynesboone.com haynesboone.com 50

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