Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries

Transcription

1 Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries Fitch Case Studies 12 th Edition January 2017

2 Corporates / U.S.A. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries Fitch Case Studies 12th Edition Special Report In this update to Fitch Ratings recurring U.S. corporate bankruptcy case-study series, Fitch provides 22 analyses of recently resolved cases and republishes 29 sector case studies from the April 2015 edition. Disclaimer: Fitch cautions that the case studies are not intended to provide exact recovery outcomes, valuations or legal opinions. Estimates in this report may vary significantly from final case outcomes. Related Research The Drill Bit Docket: High-Yield Oil & Gas Handbook (North American Exploration and Production) (December 2016) U.S. Leveraged Finance: Road to Recovery Ratings (Recovery Prospects Trend Lower) (December 2016) Fitch U.S. High Yield Default Insight (U.S. HY Default Rate Roughly 3%; iheart Largest U.S. Bonds of Concern Name) (December 2016) Retail Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies 10th Edition) (September 2016) Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies Edition VII) (April 2015) Analysts Sharon Bonelli sharon.bonelli@fitchratings.com Joan Okogun joan.okogun@fitchratings.com Greg Fodell gregory.fodell@fitchratings.com Monica Bonar monica.bonar@fitchratings.com Colin Cordes colin.cordes@fitchratings.com Shalini Mahajan shalini.mahajan@fitchratings.com Record 2016 Default Volumes: Default rates in the high-yield energy and metals & mining (M&M) sectors ended 2016 at 18.8% and 17.4%, respectively. As commodity prices bottomed out in the first quarter, producer cash flows plummeted, causing highly leveraged issuers with insufficient liquidity and limited market access to file for bankruptcy. Default rates are decreasing, as most large sector filings have already occurred and prices have stabilized. Default Risk Remains: Fitch Ratings identified 21 energy and M&M issuers with $27.2 billion of bonds (U.S. and Yankee issues) and 22 term loan borrowers with $16.5 billion of loans perceived to be at high risk of defaulting within one year of Dec. 31, 2016 based on low issue trading prices, credit ratings or Fitch views. Fitch forecasts a 3% 2017 U.S. energy default rate. Smaller Companies, High-Cost Regions Exposed: Many of the recent filings were made by smaller exploration and production (E&P) companies or by drilling service providers affected by draconian capex cuts executed by producers, resulting in limited contracting opportunities. Coal defaulters affected by weak market prices and rising environmental and operating costs are also studied. Default Drivers: High leverage and weak liquidity during the price trough were compounded by factors such as lack of scale, operational issues, adverse events and environmental liabilities. Asset-based loan (ABL) borrowing base cuts, low buyer appetite for assets when market prices were volatile and spotty capital market access were additional contributors. Superior First-Lien Recoveries: The average first-lien recovery rate was 83% (equivalent to RR2 on Fitch scale) for 73 first-lien issues in the case studies, compared with 84% in the April 2015 edition of this report. While strong within Fitch s recovery rating (RR) scale, a number of first-lien distributions included new debt and/or new equity rather than cash. Fulcrum security positions moved up in the capital structures because of relatively low valuations at the time of reorganization plans, resulting in lower recoveries for more junior debtholders. Lower Unsecured Recoveries: Depressed enterprise valuations, sluggish sector M&A/asset sale activity in the earlier part of 2016 and high leverage pressured unsecured issue recoveries. The average recovery rate for 48 unsecured claims was 30%, compared with 47% for 20 unsecured issues in the cases profiled in the April 2015 edition. The median and average second-lien issue recovery rates were 19% and 45%, respectively, for 20 issues. Shorter Duration: Fitch observed a growing trend of filings made with restructuring support agreements (RSAs). Pre-negotiation of plan terms led to shortened bankruptcy processes. The median duration for the 22 newly added sector cases was four months from filing to confirmation date, compared with 11 months for the 29 older cases in the 2015 edition. 6.3x Median Energy Multiple: The median enterprise valuation multiple for the 21 energy cases was 6.3x, with a very wide dispersion around the median. The medians for small samples of M&M and power cases were 5.6x and 11.1x, respectively. Valuation: Fitch typically values E&P companies in our recovery analysis based on reserve asset net present values and for wholesale power companies on a discrete plant NPV basis.

3 Table of Contents Introduction Default Drivers... 4 Recovery Rates... 7 Asset and Enterprise Valuation... 8 Shorter Duration of Recent Cases...11 Mineral Rights Issues in Bankruptcy...11 Recent Defaults...13 Potential Sector Defaults...13 Appendix A: Issue Recovery Detail...14 Appendix B: Concession Payments...15 Appendix C: Mineral Rights...18 Appendix D: Bonds and Loans of Concern...19 Appendix E: Bond Defaults...21 Appendix F: How Reserve-Based ABLs Work...23 Appendix G: Reserve Asset Value...24 Case Studies Aleris International, Inc Allied Nevada Gold Corp Alpha Natural Resources, Inc Arch Coal, Inc ASARCO LLC...38 Atlas Resources Partners LLC...41 Aventine Renewable Energy Holdings Inc Barzel Industries Inc Baseline Oil and Gas Corporation...50 Calpine Corporation...53 Chemtura Corporation...56 Crusader Energy Group...59 Delta Petroleum Corporation...62 Dune Energy, Inc Dynegy Holdings, LLC...68 Edison Mission Energy...71 Energy & Exploration Partners, Inc Energy Partners, Ltd Entergy New Orleans, Inc Geokinetics, Inc Global Geophysical Services, Inc GMX Resources, Inc Halcon Resources Corporation...92 Hercules Offshore, Inc. (2015)...95 James River Coal Company...98 Lyondell Chemical Company Magnum Hunter Resources Corporation Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 2

4 Table of Contents (Continued) Case Studies (Cont.) Mirant Corporation MolyCorp, Inc Offshore Group Investment Limited Pacific Energy Resources Ltd Patriot Coal Corp. (2012) Patriot Coal Corp. (2015) Penn Virginia Corporation Quicksilver Resources Inc RAAM Global Energy Company Sabine Oil & Gas Corporation SandRidge Energy, Inc Seahawk Drilling, Inc SemCrude L.P. (SemGroup) Seventy Seven Energy Inc Stallion Oilfield Services Ltd Swift Energy Company Teton Energy Corp Texas Competitive Electric Holdings Company LLC Trico Marine Services, Inc Tronox, Inc Tuscany Holdings (USA) Ltd TXCO Resources, Inc Venoco, Inc. (Denver Parent) VeraSun Energy Corporation Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 3

5 Default Drivers Cyclical Trough The filing dates for many of the 51 bankruptcy cases analyzed were clustered around two cyclical commodity price trough periods: July 2008 November 2009 (15 cases) and March 2015 July 2016 (20). The total date range for the 51 cases was July 2003 July 2016, with 16 cases occurring in non-trough markets. While markets in non-commodity sectors were more accommodating in the recent commodity price downturn, lack of market access for distressed issuers in the energy and M&M sectors was also a problem during the latest trough. Low Oil Prices The chart below plots the petition dates of 26 oil-price-sensitive energy companies against the per-barrel price of West Texas intermediate (WTI) oil. Prices plunged to a sub-$30 level in late February Prices then began to recover, with another bump up from OPEC s decision to cut production in December. WTI Prices and Bankruptcy Filing Dates Atlas Resources Partners LLC Tuscany International Seventy Seven Energy Inc. (USD/bbl) Holdings (USA) Ltd. Dune Energy, Inc. GMX Resources, Inc. SandRidge Energy, Inc. 160 VeraSun Energy Venoco, Inc. (dba Denver Parent) 140 Corporation Delta Petroleum Corporation Swift Energy Company 120 Energy Partners, Ltd. Energy & Exploration 100 Partners, Inc. TXCO Resources Inc. Offshore Group 80 Quicksilver Investment Ltd. Teton Energy Corp. Resources Inc. 60 Geokinetics, Inc. Stallion Oilfield Services Ltd. Sabine Oil and Gas Corp. 40 Hercules Offshore, Inc. (2015) Baseline Oil and Gas Corp. 20 Pacific Energy RAAM Global Energy Resources Ltd. Crusader Energy Group Magnum Hunter Resources Corp. Swift Energy Co. Halcon Resources Corp Bbl Barrels. Source: Bloomberg, Fitch Ratings, BankruptcyData.com. Fitch s base case price deck assumes a $45/barrel WTI price for 2017 based on expectations of high inventories and the potential for shale production to quickly ramp up. Fitch also assumes $55/barrel for 2018 and recently introduced a $60/barrel assumption for The long-term price assumption remains $65/barrel. Base case natural gas price assumptions are $2.75/thousand cubic feet (mcf) in 2017, $3/mcf in both 2018 and 2019, and a long-term price assumption of $3.25/mcf. Related Criteria Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (November 2016) The recent cyclical commodity price uptrend came too late to save many highly leveraged U.S. E&P companies and oil field service companies from bankruptcy. Capital structures were highly leveraged, as the shale producers had been focused on debt-funded growth rather than FCF generation. As a result, recent reorganization plans were prepared at a time of cyclically low fundamental valuations and minimal buyer appetite for reserves or whole-company acquisitions during the trough. As commodity prices recover, Fitch anticipates valuation fights initiated by unsecured creditors or shareholders will continue, as these junior claimants argue for a higher valuation that could result in a bigger equity ownership stake in the post-emergence company, all else equal. One example of a recent valuation dispute was Sabine Oil & Gas Corporation, an independent E&P company that emerged in August 2016 after a contentious bankruptcy process. The Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 4

6 $927 million of reserve-based revolver claims received most of the new common stock and recovered in the 53% 69% range (Fitch RR3). Holders of $1.2 billion of unsecured notes argued in mediation and a court trial for an updated valuation to reflect higher oil prices since the completion of the original valuation and also advocated for a sale of the company. The unsecured holders ultimately received de minimis recoveries of 1% 2%. Metals & Mining Cycle Fully 63% of bonds issued by U.S. coal companies included in Fitch s default index were in default as of Nov. 30, 2016, as low prices and weak demand led to widespread distress. The case studies include five bankruptcies of leveraged coal companies. Leveraged coal companies were unable to overcome challenges from weak pricing for both steam and metallurgical (met) coal and increasing environmental compliance costs. Met coal prices in December 2015 were 75% lower than their previous high in Like the oil cycle, coal markets are showing nascent signs of price recovery. However, steam coal is in a long-term secular decline because of the move towards cleaner natural gas-fired and renewable electric energy generation sources. Relatively higher-production-cost Appalachian steam coal is particularly challenged. Higher prices, particularly for met coal, in the latter half of 2016 came too late for coal producers that had leveraged up to make acquisitions during the market peak earlier in the decade and were unable to sustain their capital structures or raise new capital in the downturn. For example, Alpha Natural Resources, Inc. purchased Massey Coal in a $6.7-billion debtfunded acquisition at the peak of the coal cycle in 2011, and the debt burden became unsustainable when demand and market prices dropped. Other types of metals and mining companies also placed some blame for their bankruptcies on low commodity pricing. For example, Molycorp, Inc., a producer and processor of rare earth metals, experienced declining cash flow as a result of steep declines in market pricing as Chinese supply increased on the back of reduced export restrictions and decreases in export tariffs. Smaller, Less-Diverse Companies Many of the companies in this study were relatively small companies with operational weaknesses and limited geographic or operational diversity. Twenty-five of the companies had EBITDA of less than $100 million in the year prior to the filing, and the median EBITDA for the group was $95 million. Companies with material geographic concentration included a number of shale producers and also oil and gas drilling service companies that suffered revenue losses when producers reduced activity in their region and/or demanded price concessions on drilling service contracts. Legacy Liabilities and Litigation Burdensome legacy liabilities and/or litigation, including environmental and labor issues, were key bankruptcy drivers for Alpha Natural Resources, Patriot Coal Corp. and Chemtura Corporation. Alpha Natural Resources received a regulatory bonding request that added to liquidity strains. Alpha Natural Resources was notified by the Wyoming Department of Environmental Quality in May 2015 that it no longer qualified for self-bonding and had to provide more than $400 million in the form of surety bonds, cash or letters of credit to secure reclamation obligations within Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 5

7 90 days. In July 2015, the West Virginia Division of Mining and Reclamation also made a thirdparty bonding request. Patriot Coal was burdened by large retiree healthcare benefit and labor obligations, along with coal assets, when it was formed via a spinoff and in a subsequent acquisition. In the face of other emerging challenges, such as reduced coal demand and increasing environmental regulation, the company sought bankruptcy protection to resolve these legacy liabilities. Chemtura had environmental liabilities relating to diacetyl that contributed to the filing. Fitch s recovery criteria allows for the inclusion of non-debt liabilities in the recovery waterfall as deemed appropriate by the rating committee. Extreme Events A handful of the case studies, such as those of Venoco, Inc., Energy Partners Ltd. and Geokinetics, Inc., had filings that were partially triggered by extreme events further compounding cyclical challenges. Venoco, an E&P company, was adversely affected by an oil spill from a pipeline owned by Plains All American that served some of Venoco s major drilling locations near the Santa Barbara, CA shore. The spill forced the shut-in of about half of production and further strained already-tight liquidity. For Energy Partners, a hurricane caused damage to a third-party pipeline that also led to a shut-in of production for an extended period. In Geokinetics case, an accident caused fatalities on a mapping expedition in Mexico, and this was a contributing factor to the bankruptcy filing. ABL Borrowing Base Resets Many E&P companies in the case studies relied on ABL revolving credit facilities to fund their liquidity needs. However, facility borrowing bases were cut following declining oil prices and lower hedge protection, which led to erosion of reserve values. The downward borrowing base redeterminations, which occurred primarily in the spring of 2016 further reduced liquidity when cash flows were already negative for most high-yield E&Ps. Halcon Resources Corporation is a notable case discussed in this report. Fitch observed aggressive actions as commodity prices declined, Some distressed E&P companies chose to fully utilize their ABLs in advance of redetermination dates. Such actions were used both as a negotiating tactic during restructuring and to boost cash liquidity before filing Chapter 11 to obviate the need for a debtor in possession (DIP) facility. For example, Sabine utilized all remaining availability ($356 million draw) on Feb. 24, 2015, prior to a borrowing base reduction scheduled for April The borrowing base was revised downward to $750 million from $1 billion on April 27, 2015, resulting in a deficiency. The company filed for bankruptcy on July 15, SandRidge Energy, Inc. also fully drew its revolver prior to filing. Linn Energy, LLC, a large E&P company that filed in May 2016 and remains in bankruptcy, is a third example of a company that fully utilized its reserve-based revolver prior to filing. Linn drew the approximately $919 million of remaining availability under its $3.1 billion facility shortly before filing. Asset-based lenders across all sectors traditionally strive to limit loans to levels that ensure that underlying collateral is sufficient to fully repay loans in a default situation. Market participants refer to this as a second way out. The lenders to the ABL facilities in the Fitch energy and Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 6

8 commodity sector case studies were, for the most part, successful in this regard, but there were some notable exceptions, including the aforementioned Sabine example as well as in the Teton Energy Corp. case. Teton s lenders received recoveries of 79% (equivalent to a Fitch RR2 recovery rating). This facility had a borrowing base overage on the bankruptcy petition date with borrowings of $22.5 million, compared with a base of $14 million. In other cases, the ABL was converted to a DIP that in turn converted to an exit facility, or ABL lenders received distributions in new stock. For information on the mechanics of ABLs, refer to Appendix F. Recovery Rates First Lien Recovery rates on first-lien claims tended to be strong and averaged 83% for the sector cases studied. First-lien claims included revolving facilities, term loans and first-lien secured bonds. Forty-seven of the 73 first-lien issues (64%) had recoveries of 91% of more, which is equivalent to Fitch s strongest RR1 recovery category (although many of these payments were not paid solely in cash). There were, however, a handful of low-recovery-rate first-lien claim outliers as a result of depressed valuations combined with a large component of first-lien debt in the capital structures. One example is Energy & Exploration Partners, Inc. The E&P company s plan was confirmed in April 2016, which was shortly after oil prices bottomed. The third-party valuation advisor estimated the total enterprise value of the reorganized company to be approximately $175 million $225 million, with a midpoint of $200 million, relative to first-lien term loan claims of $764 million. The distribution of first-lien debt issue recoveries is shown in the chart below. Recovery rate details by debt seniority are summarized in Appendix A and shown with greater detail in the case studies. First-Lien Recovery Distribution (Number of Issues) (% of Par Value) Source: Company disclosure statements, Fitch Ratings. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 7

9 Unsecured Unsecured claim recoveries were much more varied than secured and averaged 30% of par value for 73 issues, compared with 47% for 43 first-lien issues in the April 2015 edition of the sector bankruptcy study. The lower recoveries reflect the depressed enterprise valuations that resulted from low commodity prices in more recent cases. The distributions made to unsecured creditors (or other classes) were sometimes the result of a negotiated settlement executed prior to or during the bankruptcy process. Fitch refers to these settlement payments as concession payments in its recovery tools and does not speculate whether the negotiation would occur prior to filing or during the bankruptcy. Details of concession payments are in Appendix B. Arch Coal, Inc. s plan of reorganization is an example of a plan that was the product of a negotiated settlement. In this case, unsecured creditors received recoveries because the firstlien lenders consensually agreed that unsecured claimholders would receive 6% of the common stock of the reorganized company, warrants for 12% of the common stock and $30 million in cash. Senior management also agreed to waive $5 million of payments in the settlement. Second Lien Second-lien debt was a popular financing method used by leveraged E&Ps that ultimately filed for bankruptcy protection. It was sometimes issued as currency in so-called up-tiering debt exchanges that provided new second-lien paper to unsecured debtholders that elected to tender unsecured issues (often at a significant discount to par value). Several companies accessed the second-lien market in the spring of 2015 when there was a temporary upward rebound in oil prices. However, the value of these bonds quickly eroded when oil prices resumed their downward march that summer. Venoco completed an up-tier exchange of unsecured for second-lien debt in the spring of The company filed about a year after the issuance. Holders of the $172 million second-lien issue recovered 0% 6% on their claims in the form of 10% of the new common equity. In a second example, Energy XXI Ltd. issued $1.45 billion of second-lien notes in March The company filed in April 2016 and the plan of reorganization was confirmed on Dec. 13, Under the plan, holders of second-lien claims are expected to receive a recovery of 24.5% 36.2% in the form of new equity. SandRidge Energy s plan provided second-lien holders with 85% of the new common stock for a 68% recovery rate. The plan was the product of an RSA. Recovery rates on average (45%) tended to look more like unsecured debt than secured debt rates. The median second-lien recovery was 19% on 20 second-lien issues analyzed. Asset and Enterprise Valuation Given the volatility of commodity prices, E&P companies are less often valued using LTM EBITDA or other earnings multiples typically used in other corporate sectors. Instead, when analyzing recovery prospects of upstream exploration and production companies, a discrete net present value (NPV) of the oil and gas reserve assets is the approach usually employed. However, a per-barrel approach (for production or proven reserves) is also commonly used in the market to describe M&A transaction valuations in the subsector. Fitch analysts assume the reserves would be sold to another operator that would continue to produce oil or gas from these assets, perhaps sold via a credit bid by lenders. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 8

10 Most companies in this case study were reorganized as public or private companies and nine companies sold all assets as a going concern. Eight of the companies in the Fitch sector study were fully liquidated, including piecemeal sales of all assets. The ongoing Paragon Offshore case had an unusual twist on valuation issues. The bankruptcy judge, on Oct. 30, 2016, denied the reorganization plan proposed by the drilling rig operator. The decision stemmed from what was considered to be an overly optimistic management forecast with regard to cash flow growth from higher day rates and fleet utilization. The decision in the case highlighted the view that too much cash was being paid out to unsecured creditors given the depth of the servicer market downturn and that the company would emerge with too much debt and insufficient liquidity. The plan would have left prepetition shareholders still owning a 53% stake in the company. The term loan lenders, which would have had their claims reinstated, also opposed the plan. The multiples in recent coal sector reorganization plans tended to be relatively low, as the business is in secular decline for reasons including competition from natural gas and increasing environmental costs. Patriot Coal reorganized at a 6.8x multiple in its 2012 bankruptcy and was valued at just 4.2x forward cash flow in its 2015 case. Fitch E&P Valuation Approach Recovery values for upstream E&P companies are based on the higher of a GC approach or the estimated liquidation value of proven (1P) oil and gas reserves, which Fitch estimates using several techniques. These include the NPV/barrel of oil equivalent (boe) for 1P reserves using Fitch s base case price deck, the standardized measure/boe as defined by the SEC and disclosed in company 10-K filings (present value of estimated future cash inflows from proven reserves, less operating costs, capital costs and taxes, then discounted at 10% per year) and other techniques, including peer comparisons and market transaction multiples, adjusted for production mix as well as location and quality of reserves. Fitch also attributes value to non- E&P segments, such as midstream subsidiary assets and in-the-money hedges, where applicable. When allocating the asset value to estimated claims in a recovery waterfall, Fitch may elect to include estimates for material non-debt claims, such as legal, employee benefit or environmental liabilities (e.g. plugging, abandonment, asset retirement obligations or operating lease obligations). E&P Liquidations and Sales of All Assets at Low Prices Several of the court-supervised sales were done through credit bids by the lenders (non-cash bids for the assets in exchange for canceling the remaining loan amount). The market for assets was stagnant for a period in 2016 amid uncertainty on the timing and extent of market recovery and distressed investors kept their powder dry. RAAM Global Energy Company is one example where lenders, in addition to other parties, bought the company s assets in exchange for cancellation of their debt. Many of the reorganization plans were based on RSA settlement values that were negotiated among creditors, the debtor and other parties for purposes of the plan rather than a third-party valuation advisor s fundamental valuation estimate. In these instances, the settlement value was used to calculate the multiple. In other instances, Fitch estimated a multiple using the value estimated by summing various creditor distributions or by summing the proceeds from piecemeal asset sales. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 9

11 Reorganization Multiples Fitch estimated exit multiples of enterprise value (or asset sale value) to forward EBITDA for 33 of 51 cases. This facilitates cross-sector multiple comparisons with all corporate sectors (even though this method is a less common valuation approach in the E&P and power sectors). Fitch observed a wide range of multiples in energy and commodity case studies, with more than half in the 5x 9x range, as shown in the Reorganization Multiples table at right. The median sector multiples for the energy cases (6.3x) and power cases (11.1x) were higher than the 6.0x cross-sector corporate reorganization median in Fitch s U.S. ultimate recovery database. The higher multiples were the result of cyclically low cash flow in the year following emergence. In cases where there was a very high multiple, this was because year one forecasted post-emergence EBITDA was still quite low. In year two and beyond, EBITDA was projected to substantially ramp up due to the expectation of higher commodity prices and production. For example, Offshore Group Investment Limited s (formerly Vantage Drilling) EBITDA forecast is $99 million for the first year following emergence (2017), resulting in a 12x exit multiple. For year two after emergence (2018), EBITDA is projected to grow to $211 million based on expectations of increasing day rates, utilization and efficiency for existing contracts and future speculative contracts on currently idle rigs. Should such an increase in EBITDA pan out, this would bring the multiple using year two cash flow down to near 6x. Oilfield servicers tended to reorganize at below-median multiples in recent cases given opaque visibility Reorganization Multiples Midpoint Company EV/EBITDA (x) Energy Sector Global Geophysical Services, Inc. 2.2 Geokinetics, Inc. 2.6 Penn Virginia Corporation 4.4 Venoco, Inc. (Denver Parent) 4.4 Stallion Oilfield Services Ltd. 5.0 Aventine Renewable Energy Holdings, Inc. 5.3 Seventy Seven Energy Inc. 5.6 Tuscany International 5.6 Halcon Resources Corporation 5.8 Energy & Exploration Partners, Inc. 6.1 Energy Partners, Ltd. 6.3 Atlas Resource Partners LP 6.7 Sabine Oil & Gas Corporation 6.8 SandRidge Energy, Inc. 6.9 Swift Energy Company 7.0 SemCrude L.P. (SemGroup) 7.9 Delta Petroleum Corp. 9.6 Offshore Group Investment Limited 12.1 Hercules Offshore, Inc. (2015) 17.0 Magnum Hunter Resources Corporation 37.9 GMX Resources, Inc Energy Median 6.3 Metals & Mining Sector ASARCO LLC 2.6 Alpha Natural Resources, Inc. 3.3 Patriot Coal Corp. (2015) 4.2 Aleris International 5.6 Arch Coal, Inc. 5.7 Patriot Coal Corp. (2012) 6.8 Molycorp, Inc. 8.9 Metals & Mining Median 5.6 Power Sector Mirant Corporation 8.0 Texas Competitive Electric Holdings Company LLC 9.8 Entergy New Orleans, Inc Calpine Corporation 11.4 Dynegy Corp 15.0 Power Median 11.1 Commodities Sector Chemtura Corp 5.2 Tronox Incorporated 5.9 Lyondell Chemical Company 7.7 Commodities Median 5.9 EV Enterprise value. Source: Company disclosure statements, Fitch Ratings. regarding sector recovery, amongst other factors. Valuations would consider costs to move the rigs to areas with higher drilling activity, low asset utilization, idle crew costs and relatively older rig fleets owned by defaulters that were more difficult to monetize. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 10

12 For this edition of the case study series, Fitch estimated reserve asset values for certain bankruptcies filed between 2008 and 2016, where reliable public information was available to supplement the reorganization multiple enterprise valuation data summarized above and common to all U.S. corporate sector case study reports. These asset valuations were completed on a reserve basis using inputs that included third-party estimated enterprise valuations or actual sales of all or a majority of the company s assets during or shortly after the bankruptcy process. The median realized multiple was $6.42/boe, with a wide range of $1.30 $61.00/boe. The mean realized multiple was $10.80/boe, with over 77% of companies below this threshold. This analysis may have some variability based on timing of data, as reserve estimates were completed up to a year prior to the bankruptcy filing date, reflecting pricing economics at that time. This data is provided in Appendix G and gives additional perspective on boe values by factoring in other market transactions and information on some older cases that were not included in our case study sample. Shorter Duration of Recent Cases The trend towards filing bankruptcy with pre-negotiated RSAs in place picked up in 2016 because the objective of many recent sector filings was limited to a debt-to-equity conversion. As a result, the bankruptcy periods were shorter than in earlier cases. The median duration for the 22 newly added sector cases was just four months, compared with 11 months for the 29 older cases analyzed in the April 2015 edition that were filed between July 2003 and March Five energy cases were completed in roughly one month from filing to confirmation date. Texas Competitive Electric Holdings Company LLC was an outlier among the recent crop. This case took 28 months to resolve, as there was a highly complex and layered capital structure and creditor disputes and the company was split off from its parent, Energy Future Holdings Corp., which remains in bankruptcy. Many of the earlier cases also took a long time to resolve because of complex and contentious labor, contracts or creditor arrangements. Cases with one or more of these complex issues that took longer than average to resolve include ASARCO LLC (52 months), Mirant Corporation (29 months), Calpine Corporation (24 months) and Barzel Industries Inc. (24 months). Mineral Rights Issues in Bankruptcy Background E&P companies enter into lease agreements with landowners to obtain the rights, namely a working interest, to explore and produce oil and gas below the leased land. Landowners retain royalty interests in the mineral assets rights. After a lease agreement is signed, the E&P company may enter into financing agreements with creditors and farm out agreements with oilfield service companies and pipelines to finance and service production at the site. These agreements transfer various types of interests and payments from the producer s working interest to the creditor or providers of drilling and transportation services. The types of transfers include: overriding royalty interests (ORRIs), net profits interests (NPIs), volumetric production payments (VPPs) and monetary production payments (MPPs). See Appendix C for further information on the transfer of mineral rights in bankruptcy. These agreements are controlled by state law and their treatment in bankruptcy varies substantially by state. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 11

13 Three Key Issues Relating to Mineral Rights The key mineral rights issues directly affect the bankruptcy plan enterprise valuation and creditor distributions. Local treatment is difficult to predict. Issue 1: Treatment of Landowner Lease Agreements Oil and gas lease agreements with landowners are designated by states as unexpired leases or transfers of real property. Unexpired leases must be assumed or rejected by the debtor in bankruptcy. On the other hand, transfers of real property pass through the bankruptcy process unaltered. However, state laws vary on whether the lease agreement is a transfer of real property or an unexpired lease, and uncertainty remains in most states. Only two states, Texas and Louisiana, have settled this issue. Texas treats lease agreements as a transfer of real property. Therefore, no assumption or rejection is required and, importantly from a credit perspective, reserves are included in enterprise value estimate. States that may potentially align with Texas on this issue include Alabama, Arkansas, Colorado, Michigan, Mississippi, Montana, New Mexico, Ohio, Pennsylvania, Tennessee and West Virginia. Louisiana, on the other hand, treats landowner agreements as unexpired leases. Therefore, the debtor must either make a cash payment (administrative expense) to cure and assume the lease, which keeps the reserve in the enterprise value estimate, or reject the lease, which would exclude the reserves from the enterprise value estimate. States that may side with Louisiana include California, Indiana, Kentucky, New York, Oklahoma and Wyoming. However, without further case law, it is difficult to ascertain the exact treatment of those leases in jurisdictions other than Texas and Louisiana. Issue 2: Treatment of Production-Specific Financing Agreements and Farmout Agreements Oilfield financing agreements must be classified as transfers of interests in real property or executory contracts. Decisions depend on the treatment of landowner lease agreements discussed above, and state laws also vary greatly. If the oil and gas lease is rejected, then related oilfield service, transportation and production financing agreements are automatically rejected as well. If the lease is deemed a transfer of real interest, the court would likely find related financing and farmout agreements as transfers of real interest as well. Therefore, the agreements would pass through bankruptcy unaltered. Issue 3: Treatment of ORRIs, NPIs, VPPs and MPPs If ORRI, NPI, VPP and MPP arrangements are excluded from the E&P debtor s estate, then the production-specific creditors and servicers holding those interests are ineligible to participate in the bankruptcy proceeding. They retain their interests in the reserve and do not have claims against the debtor s estate. If the interests are considered part of the E&P debtor s estate, then creditors and servicers participate in the bankruptcy proceeding and can recover any deficiency claims as unsecured creditors. A graphic flow chart of these issues is presented in Appendix C. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 12

14 Recent Defaults The large volume of defaulted debt pushed bond default rates for the energy and M&M sectors to record peaks of 18.8% and 17.4%, respectively, in Sixty-eight high-yield bond issuers in the energy, M&M and power sectors defaulted in Nearly $54 billion of debt was affected. Defaults under Fitch s criteria include out-of-court distressed debt exchanges, missed interest payments and bankruptcy filings. The full list of 2016 defaults is included in Appendix E. Fitch believes most of the large energy cases have already been filed and the default rates for energy and M&M will significantly decline. Some of the most recent commodity-sensitive issuer cases are not yet resolved and will be studied in future editions of this report. Cases still in process include: Bonanza Creek Energy, Inc., Memorial Production Partners LP, Illinois Power Generating Co. and Stone Energy Corporation. Energy XXI s reorganization plan became effective on Dec. 30, 2016, and this case will also be analyzed in a future edition. Fitch is forecasting a 3% U.S. energy sector bond default rate for 2017 and a 9% energy default rate for Yankee bond issuers (non-u.s. companies that issue in the U.S. market). One recent filing in the power sector was Illinois Power, an indirect, wholly owned subsidiary of Dynegy Inc. that filed for Chapter 11 on Dec. 9, 2016 with a prepackaged plan of reorganization. Illinois Power owns approximately 3,000 MW of coal-fired generation capacity located in the Midcontinent Independent System Operator (MISO). Its generation portfolio has continued to be challenged by weak electricity prices driven by sustained low natural gas prices and flat electricity demand. The increasing penetration of wind energy, driven by state mandates and federal policy initiatives as well as strong wind resource availability in several Midwestern regions of the U.S., has also affected energy prices in MISO. In addition, the lack of a robust capacity market construct in MISO has provided limited visibility into the long-term fixed-cost recovery for existing merchant power plants. The hybrid nature of resource ownership and guaranteed return for load-serving entities owned and contracted generating resources through the regulatory mechanisms has dampened capacity prices. Illinois Power s coal generation portfolio was also disadvantaged given tightening environmental regulations. Low generation margins rendered it uneconomic for Illinois Power to incur compliance expenditures to meet the various federal environmental and Illinois multi-pollutant standards. A second filing by a coal-fired power generator was Homer City Generation LLP, a project finance entity that owns three units east of Pittsburgh that petitioned for bankruptcy on Jan. 11, Homer City was challenged by increased natural gas competition and lower energy costs, as well as higher environmental compliance costs on units that have been operating since the late 1960s and 1970s. Potential Sector Defaults Fitch screened the issuers of high-yield bonds and leveraged term loans in the energy and M&M sectors for companies with significant default risk by flagging issues trading at low prices, those with low ratings or other issues. We identify bond bids at a distressed price of $0.70 or lower and loans bid a $0.80 or less as of Dec. 15, Companies can also be placed on the Loans or Bonds of Concern lists for other problems that elevate the risk of default. Fitch identified 21 energy and M&M high-yield issuers (including U.S. and Yankee bond issuers) with $27.2 billion of bonds outstanding and 22 term loan borrowers with $16.5 billion of loans with significant risk of default, with details provided in Appendix D. Petroleos de Venezuela S.A. (PDVSA) singly accounts for nearly $13 billion of the bonds of concern and is the driver of Fitch s higher default rate forecast for Yankee issuers in the sector. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 13

15 Appendix A: Issue Recovery Detail Issue Recovery Rate by Seniority (% of Claim Par Value) Company First Lien Second Lien Senior Unsecured Subordinated Aleris International, Inc. 100/97/28/21/1 1 Allied Nevada Gold Corp. 100/100/ Alpha Natural Resources, Inc. 79/ Arch Coal, Inc. 100/ ASARCO LLC 100 Atlas Resource Partners, L.P Aventine Renewable Energy Holdings Inc Barzel Industries Inc. 100/10 Baseline Oil and Gas Corporation 65/65 Calpine Corporation Chemtura Corporation Crusader Energy Group Delta Petroleum Corporation Dune Energy, Inc Dynegy Holdings, LLC 55 Edison Mission Energy >80 Energy & Exploration Partners, Inc. 8 >0 Energy Partners, Ltd Entergy New Orleans, Inc Geokinetics, Inc. 100/69 Global Geophysical Services, Inc GMX Resources, Inc Halcón Resources Corporation /21 Hercules Offshore, Inc. (2015) 41 James River Coal Company 100 4/2 Lyondell Chemical Company 100/66 Magnum Hunter Resources Corporation Mirant Corporation /62 39 Molycorp, Inc Offshore Group Investment Limited 100/ Pacific Energy Resources Ltd. 100/ Patriot Coal Corp (2015) 100/100/80 16 >0 Patriot Coal Corp. (2012) 100 6/<1 Penn Virginia Corporation Quicksilver Resources Inc RAAM Global Energy Company 95 >0 Sabine Oil & Gas Corporation SandRidge Energy, Inc Seahawk Drilling, Inc. 100 SemCrude L.P. (SemGroup) 56/76/100 9 Seventy Seven Energy Inc. 100/100 53/4 Stallion Oilfield Services Ltd /66 Swift Energy Company Teton Energy Corp Texas Competitive Electric Holdings Company LLC (TCEH) /3 Trico Marine Services, Inc. 100/100/ Tronox, Inc Tuscany Holdings (USA) Ltd. 81 TXCO Resources, Inc Venoco Inc. (Denver Parent) />0 VeraSun Energy Corporation 100/100/59/70/ Median Recovery N.A. Average Recovery N.A. Claim Count N.A. Not applicable. Note: Multiple debt issues at same seniority are separated by a "/". Fitch shows midpoint of range in this table if disclosure statement had a range of recovery rates for a claim class. See case studies for further detail. Source: Company disclosure statements, Fitch Ratings. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 14

16 Settlement/Concession Payments Appendix B: Concession Payments Company Resolution Payor Recipient Allied Nevada Gold Corp. Emerged/Reorganized Unsecured, Subordinated (Private) Including Notes and Old Equity Aleris International, Inc. Emerged/Reorganized Secured Unsecured (Private) Creditors Arch Coal, Inc. Atlas Resources Partners LLC Barzel Industries Inc. Baseline Oil and Gas Corporation Crusader Energy Group Dune Energy, Inc. Dynegy Holdings, LLC Energy & Exploration Partners Energy Partners, Ltd. Geokinetics, Inc. GMX Resources, Inc. Halcon Resources Corporation Hercules Offshore, Inc. (2015) Lyondell Chemical Company Emerged/Reorganized (Public) Emerged/Reorganized (Public) Sale of All Asset (as Liquidation) Emerged/Reorganized (Private) Sale of All Asset (as Liquidation) Sale of All Asset (as Liquidation) Emerged/Reorganized (Public) Emerged/Reorganized (Private) Emerged/Reorganized (Public) Emerged/Reorganized (Private) Emerged/Reorganized (Private) Emerged/Reorganized (Public) Emerged/Reorganized (Private) Emerged/Reorganized (Public) First Lien and Management Unsecured, Including Second-Lien Deficiency Claims Senior Unsecured General Notes Unsecured Secured Note Certain Holders Unsecured Claims Held by Environmental Agencies Secured Note Holders Second-Lien Holders First-Lien Holders Second Lien and General Unsecured Unsecured Claims First Lien General Unsecured and Noteholders Senior Notes EV or LV ($ Mil.) Rough Estimate of Payment as % of Total EV Notes 250 <1 Recipients received warrants that could have value based on future performance. 1,060 <1 Unsecured claims other than convenience claims and insured claims received $16.5 million. Convenience claims received 25% recovery or 50% if certain conditions were met Unsecured creditors received distributions that resulted from a settlement. The first-lien lenders agreed that unsecured claimholders will receive 6% of the common stock of the reorganized company, warrants for 12% of the common stock and $30 million in cash. The first-lien lenders reached the negotiated settlement after agreeing that the company s 49% interest in Knight Hawk was excluded from the first-lien collateral assets and in addition, senior management agreed to waive $6 million in incentive compensation to facilitate the settlement. 779 Not Available General unsecured claims were paid in full; amount not available Unsecured claims held by the U.S. Environmental Protection Agency and the Rhode Island Dept. of Environmental Management received $500,000 from secured noteholders per a settlement. Unsecured Royalty claims and general unsecured claims together totaling $4 million were paid in full. M&M Secured M&M claims consisted of claims of joint owners and Claims and operators; holders received $18 million, or 60% General recovery, on $30 million of related claims. Unsecured Unsecured claims of $26 million paid $11 million, or 32.5% Distributions to second-lien deficiency claims and general unsecured based on a plan compromise. Old Equity 3, Equityholders received 1% of new common equity and warrants for new equity General unsecured claims received 4.6% recoveries as a result of the first-lien settlement and convenience claims (<$1,000) were paid 100%. First-lien creditors waived any recoveries on $718 million of deficiency claims until allowed general unsecured claims recovered 15% of their claim amount. Noteholders received warrants. General Unsecured and Old Equity Interests Old equity interests received 5% of the new stock. General unsecured received $5 million in cash (but noteholders received distributions in the form of new stock). Secured Notes Preferred Equity Preferred equity interest holders received $6 million and general unsecured claims of $11 million were paid in full. First-Lien Claims Second Lien and Unsecured Third-Lien Claims Unsecured and Preferred Holders Senior Notes First Lien Continued on next page. Source: Company disclosure statements, Fitch Ratings. General Unsecured and Old Equity Interests Second Lien Bridge Loan and 2015 Unsecured Note Claims First-lien noteholders waived deficiency claims and made contributions to a trust for unsecured. Unsecured also entitled to recoveries from causes of action, if any. 1, The plan was the product of a restructuring settlement agreement that involved a number of classes. Unsecured notes and preferred stockholders were recipients of settlement payments General unsecured claims, including trade vendors, suppliers and customers, were paid in full in the ordinary course of business and unaffected by the filing (estimated to be $40 million of claims per disclosure statement). In addition, equityholders received 3.1% of the new common stock. 15, Second-lien bridge loan received a portion of the new equity and 2015 notes entitled to distributions from trusts. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 15

17 Settlement/Concession Payments (Continued) Company Resolution Payor Recipient Magnum Hunter Emerged/Reorganized DIP Holders Resources Corporation (Private) Mirant Corporation MolyCorp, Inc. Offshore Group Investment Limited Emerged/Reorganized (Public) Emerged/Reorganized (Private) Emerged/Reorganized (Private) Pacific Energy Sale of All Asset Resources Ltd. (as Liquidation) Patriot Coal Corp. (2012) Emerged/Reorganized (Private) Patriot Coal Corp. (2015) Sale of All Assets (as Going Concern) Quicksilver Resources Inc. RAAM Global Energy Company Sabine Oil and Gas Corporation SandRidge Energy, Inc. SemCrude L.P. (SemGroup) Seventy Seven Energy Inc. Stallion Oilfield Services Ltd. Swift Energy Company Teton Energy Corp. Sale of All Assets (as Liquidation) Sale of All Assets (as Liquidation) Emerged/Reorganized (Private) Emerged/Reorganized (Private) Emerged/Reorganized (Public) Emerged/Reorganized (Public) Emerged/Reorganized (Private) Emerged/Reorganized (Private) Sale of All Assets (as Going Concern) Unsecured and Subordinated Secured Secured Term Loans and Secured Notes Second Lien Second Lien, Unsecured Notes and General Unsecured EV or LV ($ Mil.) Rough Estimate of Payment as % of Total EV Notes 850 Not Recipients were second-lien, unsecured notes and Available general unsecured claimholders. DIP lenders agreed to receive some equity, but DIP was provided by prepetition creditors below ABL. The plan was based on a compromise and settlement. Unsecured note claims and second-lien note claims received equity in the new company and general unsecured creditors received cash. Old Equity 8, Equity interests received a portion of the new shares as a result of a negotiated settlement that agreed to a higher enterprise value. General Unsecured General Unsecured General unsecured claims that voted to accept the plan received warrants to purchase new equity that had an estimated value of $20.6 million, but could be higher or lower depending on the company s performance during the five-year warrant exercise period. The value came from distributions that would have otherwise gone to Oaktree. 1,205 Not General unsecured claims paid in full; amount of claim Available undisclosed. Unsecured Creditors 295 Not Amounts not available. Available Guaranteed General 1, Received 5% of new stock and warrants to purchase Senior Notes Unsecured and 4.62% of new shares. Senior Convertible Notes Second Lien Unsecured, 698 >0 Second-lien deficiency and other general unsecured Including claims received nominal distributions from the general Deficiency Claims unsecured distribution pool. Second Lien Unsecured Unsecured creditors received $17.5 million cash and 50% of recoveries from the Canadian proceeds up to $17.5 million maximum additional recovery. First Lien DIP Debtor in possession. Continued on next page. Source: Company disclosure statements, Fitch Ratings. Reserve-Based First-Lien ABL Revolver Second Lien First Lien Credit Facility OpCo Notes First Lien and Unsecured DIP Holders Secured Credit Facilities Unsecured Surety Bond Provider and Unsecured Trade Claims Second Lien and Unsecured General Unsecured, Including Unsecured Noteholders Senior Notes, Secured Deficiency Claims, General Unsecured HoldCo Notes and General Unsecured Trade Claims and Old Equity Interests Unsecured and Equity General Unsecured, Trade Claims and 10.75% Second- Lien Convertible Notes 65 Not The first-lien lenders reached a settlement with plugging Available and abandonment obligation surety bond provider Ace and general unsecured trade claimants to gift a nominal distribution payment to these parties (amount not determined) The RBL creditors waived deficiency claims, and the length of the warrants was extended to 10 years in the final plan, which provides greater recovery to unsecured creditors. 1,180 Not Unsecured holders received 15% of the new common Available stock. 1, Unsecured notes received a portion of new stock, general unsecured received 1.25% of new stock, secured deficiency claims received potential recovery of up to 4.56% from litigation trust distributions HoldCo note claims received a concession payment of 3.25% of the new HoldCo common shares plus warrants exercisable for 15% of the new HoldCo common shares, and general unsecured received cash. 576 Not Undisclosed amount of trade claims paid in full. Old Available equity interests received 2% of new stock and warrants General unsecured creditors (excluding notes) and stock equity interests Claim amounts of general unsecured and trade were Fitch estimates. Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries 16