April 14, 2019
Austin-based independent oil and natural gas E&P company, Jones Energy Inc., filed a prepackaged chapter 11 bankruptcy to restructure its $1.009b of debt ($450mm senior secured first lien notes and $559mm unsecured notes across two tranches). In case you didn’t realize, oil and gas exploration and production is a capital intensive business.
The company operates primarily in the Anadarko Basin in Oklahoma and Texas. Its territory is the aggregation of acreage accumulated over the years, including the 2009 purchase of Crusader Energy Group Inc. out of bankruptcy for $240.5mm in cash.
We’re not going to belabor the point as to why this company is in bankruptcy: the narrative is no different than most other oil and gas companies that have found their way into bankruptcy court over the last several years. Indeed, this chart about sums things up nicely:
It’s really just a miracle that it didn’t file sooner. Why hadn’t it? Per the company:
…the Debtors consummated a series of liquidity enhancing transactions, including equity raises, debt repurchases, strategic acquisitions, non-core asset sales, and modifications of their operations to reduce their workforce and drilling activities. This included a Company-wide headcount reduction in 2016 resulting in the termination of approximately 30% of the Debtors’ total workforce, as well as halting drilling activity spanning several months during the worst of the historic commodity downturn.
But…well…the debt. As in, there’s too much of it.
And debt service costs were too damn high. In turn, the company’s securities traded too damn low:
What’s more interesting here is the process that unfolded. In February 2018, the company issued $450mm of 9.25% ‘23 senior secured first lien notes. The proceeds were used to repay the company’s senior secured reserve-based facility and eliminate the restrictive covenants contained therein. The company also hoped to use the proceeds to repurchase some of its senior unsecured notes at a meaningful discount to par. In a rare — yet increasingly common — show of unity, however, the company’s unsecured lenders thwarted these efforts by binding together pursuant to a “cooperation agreement” and telling the company to take its pathetic offer and pound sand. (PETITION Note: its amazing what lenders can achieve if they can solve for a collective action problem). This initiated a process that ultimately led to the transaction commemorated in the company’s announces restructuring support agreement.
So what now? The senior secured lenders will equitize their debt and come out with 96% of the common stock in the reorganized entity. Holders of unsecured debt will get 4% equity and warrants (exercisable for up to a 15% ownership stake in the reorganized company), both subject to dilution by equity issued to management under a “Management Incentive Plan.” The company has a commitment for $20mm of exit financing lined up (with the option for replacement financing of up to $150mm).
Hopefully the company will have better luck without the albatross of so much debt hanging over it.
Jurisdiction: S.D. of Texas (Judge TBD)
Capital Structure: $450mm 9.25% ‘23 senior secured first lien notes (UMB Bank NA), $559mm 6.75% ‘22 and 9.25% ‘23 unsecured notes (Wells Fargo Bank NA)
Legal: Kirkland & Ellis LLP (James Sprayragen, Christopher Marcus, Brian Schartz, Anthony Grossi, Ana Rotman, Rebecca Blake Chaikin, Mark McKane, Brett Newman, Kevin Chang) & (local) Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz)
Independent Directors: Tara Lewis, L. Spencer Wells
Financial Advisor: Alvarez & Marsal LLC (Ryan Omohundro)
Investment Banker: Evercore Group LLC (Daniel Aronson)
Claims Agent: Epiq (*click on the link above for free docket access)
Other Parties in Interest:
Ad Hoc Group of First Lien Noteholders
Legal: Milbank LLP (Dennis Dunne, Evan Fleck, Michael Price) & (local) Porter Hedges LLP (John Higgins, Eric English, Genevieve Graham)
Financial Advisor: Lazard Freres & Co. LLC
Ad Hoc Group of Crossover Holders
Legal: Davis Polk & Wardwell LLP (Brian Resnick, Benjamin Schak) & (local) Haynes and Boone LLP (Charlie Beckham, Kelli Norfleet)
Financial Advisor: Houlihan Lokey Capital Inc.
Metalmark Capital LLC
Legal: Vinson & Elkins LLP (Andrew Geppert, David Meyer, Jessica Peet, Michael Garza)
Updated 4/15/19 2:05 CT