October 31, 2018
The fallout from the oil and gas downturn appears to have a long tail.
Gastar Exploration Inc. ($GST), an oil and natural gas exploration and production company focused on shale resource plays in Oklahoma filed a prepackaged bankruptcy in the Southern District of Texas.
For anyone looking for a short primer on what exactly transpired in oil and gas country upon the 2014 downturn in commodity prices is in luck: the company provides a succinct explanation in its bankruptcy filings. It notes:
The market difficulties faced by the Debtors are consistent with those faced industry-wide. Oil and gas companies and others have been challenged by low natural gas prices for years. Since January 2014, natural gas prices fell from a peak of $5.39 per MMBtu in January 2014 to $1.73 per MMBtu by March 2016, and remain at approximately $3.17 per MMBtu. The price of crude oil has similarly plummeted from a high of $107.26 per barrel in June 2014 to a low of $29.64 per barrel in January 2016. Crude oil prices remain at approximately $67 per barrel. Additionally, NYMEX futures curves for both natural gas and crude oil are backward dated, indicating an expectation among real-money traders in the derivatives market that these commodity prices are expected to decline over the next several years.
These market conditions have affected oil and gas companies at every level of the industry around the world. All companies in the oil and gas industry (not just E&P companies) have felt these effects. However, independent oil and gas companies have been especially hard-hit, as their revenues are generated from the sale of unrefined oil and gas. Over 160 oil and gas companies have filed for chapter 11 since the beginning of 2015. Numerous other oil and gas companies have defaulted on their debt obligations, negotiated amendments or covenant relief with creditors to avoid defaulting, or have effectuated out-of-court restructurings.
The Debtors were not immune to these macro-economic forces.
With hundreds of millions of dollars of debt, the company managed to avoid a bankruptcy filing during that time. This is primarily due to a 2017 refinancing transaction that it consummated with Ares Management LLC pursuant to which the company took on new first lien term loans, new second lien converts, and obtained a $50mm equity investment from Ares. The capital structure, at the petition date, is comprised of these term loans and converts. The company intended the new financing to help it weather the downturn and bridge it to a more favorable operational performance and capital markets environment. Alas, it’s in bankruptcy. So, we guess we know how those intentions played out in reality. Indeed, the company experienced significant operational challenges that resulted in a decreased in well production performance — a result that came to pass only after the company incurred the costs of production. Sheesh.
Now the company seeks, in partnership with Ares, to push through a speedy chapter 11 bankruptcy that would have the effect of deleveraging the balance sheet by approximately $300mm, handing all of the equity to Ares (on account of their second lien notes claims), and wiping out the preferred and common equity — which would only be entitled to warrants in reorganized Gastar if they don’t object to the restructuring or seek the appointment of an official committee of equity security holders. Which in the case of both common equityholders (Fir Tree Capital Management LP & York Capital Management Global Advisors LLC) and preferred equityholders…uh…is exactly what they’re doing. Clearly those warrants weren’t much of a carrot. And Judge Isgur happens to have previously demonstrated a soft spot in his heart for equity committees. See, e.g., Energy XXI.
Prior to the first day hearing, Fir Tree and York (by attorneys Quinn Emanuel - a sign of seriousness) filed an emergency motion seeking the appointment of an equity committee alleging, among other things, that the company’s plan is a pure Ares jam fest. They seek an investigation of Ares’ actions (including the refinancing transaction), citing the Energy XXI case, and noting in the process that with unsecured creditors riding through the plan, there is no viable adversary to the debtor other than the zeroed-out equity. Which makes this a private equity vs. hedge fund hootenanny!
Subsequently, an ad hoc committee of preferred stockholders filed a motion joining the arguments of Fir Tree and York, noting, however, that as a preferred equity they’re liquidation preference trumps the interest of the common stockholders. They, too, want an investigation into Ares’ involvement in these cases.
A hearing is scheduled for later this week.
Jurisdiction: S.D. of Texas (Judge Isgur)
Capital Structure: see below (+$13.3mm in hedging obligations).
Legal: Kirkland & Ellis LLP (Ross Kwasteniet, Anna Rotman, John Luze, Ciara Foster, Brett Newman) & (local) Jackson Walker LLP (Patricia Tomasco, Matthew Cavenaugh)
Financial Advisor: Dacarba LLC
Investment Banker: Perella Weinberg Partners LP (Kevin Cofsky)
Claims Agent: BMC Group (*click on company name above for free docket access)
Other Parties in Interest:
Financial Sponsor: Ares Management LLC
Legal: Milbank Tweed Hadley & McCloy LLP (Paul Aronzon, Thomas Kreller, Robert Liubicic, Haig Maghakian)
Minority Shareholders: Fir Tree Capital Management LP & York Capital Management Global Advisors LLC
Legal: Quinn Emanuel Urquhart & Sullivan LLP (Emily Smith, K. John Shaffer, Benjamin Finestone, Kate Scherling)
Ad Hoc Committee of Preferred Stock Holders (Aedes LLC)
Legal: Hunton Andrews Kurth LLP (Paul Silverstein, David Zdunkewicz, Brian Clarke, Timothy Tad Davidson II)
DIP Agent & TL Agent: Wilmington Trust NA
Legal: Arnold & Porter Kaye Scholer LLP (Christopher Odell, Hannah Sibiski, Brian Lohan, Seth Kleinman)