The recent historic decline in oil prices has strained the balance sheets of E&P companies.  Whiting Petroleum Corporation, the first publicly traded U.S. E&P company to declare bankruptcy in 2020, announced its Chapter 11 reorganization process on April 1.  More are expected to follow.

Despite a much more benign commodity price environment of ~$50-$60/bbl in 2019, a number of E&P companies declared bankruptcy last year and have seen their reorganization processes derailed in 2020 as a result of low oil prices.

Sanchez Energy DIP Financing Impaired

Sanchez Energy filed for bankruptcy in August 2019, citing a misalignment between the company’s capital structure and the “continued low commodity price environment.”  At the time of filing, Sanchez had approximately $2.3 billion of debt outstanding, according to Haynes Boone.

As part of the bankruptcy process, Sanchez secured $200 million of debtor-in-possession (DIP) financing.  DIP financing is generally senior to the company’s other indebtedness, and thus usually recovered in full.  However, in light of commodity price declines caused by COVID-19’s energy demand destruction, Sanchez is only worth an estimated $85 million according to the court-approved reorganization plan.  This implies a substantial impairment of the DIP financing (to say nothing of the other $2.3 billion of debt).

Despite the approved reorganization plan, the ultimate ownership of the company is still in question.

Alta Mesa Sale Terms Revised

Alta Mesa announced its bankruptcy in September, a month after Sanchez, citing a need to “reorganize its capital structure.”  According to Haynes Boone, Alta Mesa’s debt totaled $871 million.

Alta Mesa received a $310 million stalking horse bid on December 31 from a joint venture between Mach Resources (an E&P company) and Bayou City Energy (a private equity firm).  The joint venture won the subsequent auction in January 2020, bidding $320 million, but was unable to secure the necessary financing amid the initial stages of the Saudi/Russian price war in March.  The sale ultimately went through, but at a $100 million discount.

EP Energy Restructuring Plan Scrapped

EP Energy, an Eagle Ford and Permian-focused producer, filed for bankruptcy in October.  The company was spun out from El Paso Corp. during 2012 in a leveraged buyout (LBO) led by Apollo and subsequently taken public in 2014.  The LBO left EP Energy with a massive debt balance, which stood at $7.3 billion per Haynes Boone.

EP Energy’s restructuring plan was approved on March 6, the same day Saudi Arabia and Russia failed to come to terms on an OPEC+ supply cut.  It soon fell apart, as Apollo and other financial backers pulled out.

The company has submitted a motion requesting an extension, which would give EP Energy until October 31, 2020 to file a revised restructuring plan.

Approach Resources Buyer Backs Out

Approach Resources was the last U.S. public E&P to file for bankruptcy in 2019, seeking to explore strategic alternatives including “the restructuring of its balance sheet or the sale of its business” as stated in its November press release.  The company received a stalking horse bid of $192.5 million from Alpine Energy Capital in February.  The court approved the sale in early March.  Later in the month, Alpine announced that it was terminating the agreement.  The approach subsequently sought to force Alpine to complete the purchase.

The matter has not yet been resolved.

Conclusion

Recent commodity price volatility has driven certain E&P producers to file for bankruptcy and has prevented several more from emerging.  While prices have bounced back from recent lows, they remain below breakeven costs for many producers.  As such, we expect to see continued bankruptcy filings and protracted restructuring processes.

If you want to learn more about the valuation side of the bankruptcy process, and how we at Mercer can use our years of experience in bankruptcy and the oil & gas industry to help you emerge from Chapter 11 well-prepared for future success, contact one of our valuation analysts for a confidential discussion.