Energy workouts tilt balance of power to favor Fir Tree, Oaktree, Apollo

23 March 2017

by Madalina Iacob, and Kyle Younker

 

Several distressed hedge funds who were deftly active during the energy sector bankruptcy blitz have emerged as stronger power players poised to direct the industry’s future, said multiple energy focused buysider and sellsider sources, along with several financial advisors involved in energy workouts.

 

Apollo, Oaktree, Centerbridge, Fir Tree, GSO, Anchorage, Franklin and Whitebox Advisors are among the most prominent funds expected to drive restructured E&P and servicers through a post-bankruptcy lifecycle, the sources continued. The funds’ varied ownership strategies may include bolt-on acquisitions, production growth and eventual sales to other strategics.

 

In sum, these hedge funds to date have scooped up more than USD 7bn in pre-petition bonds and loans of borrowers who emerged or are about to emerge from bankruptcy. The list of companies includes LINN Energy, SandRidge, Midstates Petroleum, Memorial Production Partners, Vanguard Natural Resources, Ultra Petroleum and Bonanza Creek, according to 2019 and other bankruptcy filings.

 

Fir Tree tops the leader board, investing more than USD 2bn in securities of bankrupt oil and gas companies with the biggest relative exposure to LINN Energy, SandRidge, Memorial Production Partners and Ultra Petroleum. The fund is followed by Franklin Advisers with USD 1.45bn invested across more than 10 bankrupt oil and gas companies including Energy XXI, Stone Energy and CHC Helicopter.

 

Chart_March2017

[Chart pulls from 2019s and other court filings.]

 

 

Second act

 

Drilling down the fulcrum in a restructuring is only half the journey for loan-to-own distressed funds. The second act amounts to the challenge of maximizing returns as a controlling shareholder in a delevered enterprise. Funds such as Whitebox, Franklin, Centerbridge and GSO typically deploy strategies that enable them to hold onto their reorganized equity stakes, aiming to grow production and acreage over time before monetizing to strategics, noted a source familiar with the industry and a distressed portfolio manager. Other distressed players employ a more immediate goal of cashing out from their positions as soon as the asset & divestitures (A&D) market heats up, said the sources.

 

Energy XXI, one of the recently emerged E&P players, just announced this week that it hired Morgan Stanley to assist with a strategic review process, which could include asset divestitures or acquisitions. FranklinOaktree and Centerbridge are among the funds who held considerable debt that got equitized during the Gulf of Mexico operator’s restructuring.

 

Sabine Oil & Gas, which emerged from a long-fought bankruptcy process in August, is also exploring the A&D market, but more narrowly by only focusing on moving its assets in the Louisiana “sweet spot” of the Haynesville Shale play. The BMO-advised company has 49 drilling locations in the Haynesville, which could attract interest from major operators in the area, including Apollo-controlled Vine Oil & GasQEP Resources or Covey Park Energy, noted a sellside analyst.

 

However, in this current environment where oil prices are still not out of the woods, bidders are mostly eyeing companies that have complementary acreage and scale in basins where strategics would benefit from consolidation in desirable regions such as the Permian in Texas, the South Central Oklahoma Oil Province (SCOOP), and the Sooner Trend, Anadarko, Canadian and Kingfisher (STACK) in Oklahoma, said multiple sources.

 

“Many of the companies that restructured don’t have the scale to be stand-alone companies,” said one energy restructuring financial advisor. “[The new owners] are happy to run the companies in the short-term but in the end everyone is focused on building scale, adding value in some way, and selling it to a strategic.”

 

Non-core properties of the recently restructured LINN Energy could be a target for larger public companies or PE-backed operators looking to build scale, said a Houston-based buysider. LINN, which emerged in February from a bankruptcy featuring debt holders Franklin, Oaktree, Fir Tree and Centerbridge, has already enlisted Jefferies to sell some assets in the Permian, Williston and South Texas. This indicates the company intends to focus on growing production in its core acreage in the cost-effective SCOOP and STACK areas.

 

Along with LINN, Chaparral Energy, which emerged from bankruptcy yesterday, has attractive assets in the STACK play which can draw investors’ interest, said the advisory sources. Franklin is among the funds with new equity exposure to both LINN and Chaparral.

 

On the acquisitive end of the restructured energy company spectrum is SandRidge, whose bankruptcy featured certain debt holders including Fir Tree, Apollo, Whitebox, and GSO recovering equity. In February, the company purchased roughly 13,000 net acres in Woodward County, Oklahoma for USD 48m, increasing its northwest STACK position to 60,000 net acres.

 

However, companies such as Samson Resources that filed for bankruptcy with below average assets that are uneconomical at current natural gas prices are likely to struggle raising strategic interest since their restructurings entailed selling properties piecemeal and then reorganizing around portfolios of less desirable assets, several analysts noted.

 

At your service

 

Expectations that M&A activity will rise in the onshore oilfield services (OFS) space were elevated recently by the USD 1.76bn merger of newly emerged wellsite services and equipment provider Seventy Seven Energy and US onshore rig contractor Patterson-UTI Energy. The merger was a boon for distressed hedge funds with positions in Seventy Seven Energy, including Whitebox, Oaktree, Blackrock and Anchorage. Moreover, the situation could become a model playbook for more consolidation in the space, said multiple sources.

 

Another restructured onshore services play where Whitebox holds a reorganized equity stake — along with Contrarian CapitalQuantum Partners and Silver Point Capital – is Key Energy Services. Because Key has a hefty backlog of maintenance work with major exploration and production companies, it’s expected to play an active role in acquiring other onshore oilfield servicers, said a second sellside analyst.

 

Key Energy’s EBITDA is projected to increase to a whopping USD 108m in 2018 from USD 18m this year on expectations that the oil and gas companies will ramp up drilling and well completion activity, the sellsider continued. Marathon Oil, for example, plans to ramp up drilling in the SCOOP/STACK areas and Bakken Shale and double spending to roughly USD 2.2bn this year from USD 1.1bn in 2016.

 

“E&Ps deferred well maintenance work to save costs and now there’s a huge backlog of maintenance that needs to be done, and the backlog will grow,” said the second sellsider.

 

For larger servicing companies such as Key who are positioned to capitalize on this dynamic, some smaller peers fresh off their own bankruptcies, companies such as Basic EnergyC&J Energy Services (Whitebox and GSO are among the funds who provided C&J with its USD 100m DIP) could provide synergistic value, several sellsiders said. Likewise, Forbes Energy Services, which is still in bankruptcy, could draw strategic interest once it delevers, they added.

 

Calls to Apollo, GSO, Whitebox, Fir Tree, Anchorage, Centerbridge, Franklin and Oaktree were not returned.