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April 30, 2020 – EP Energy Corporation filed a motion to extend the periods during which they have an exclusive right to file a Chapter 11 Plan, and solicit acceptances thereof, through and including October 31, 2020, and December 31, 2020, respectively [Docket No. 1207]. Absent the requested relief, the Plan filing and solicitation periods expire on April 30, 2020, and June 29, 2020, respectively.
Spare a thought for these Debtors. In the corporate equivalent of walking out through hospital doors having survived a heart transplant only to get blasted by the sneeze of an incoming COVID-19 patient on the hospital steps, these Debtors have gone from the March 6th heights of a new lease on life (Judge Marvin Isgur having confirmed a Plan that would slice $3.3bn off the Debtors' balance sheet) to requiring intubation in Chapter 11 ER with dozens of other oil and gas patients (that happening on March 23rd when Judge Isgur withdrew the Plan's confirmation citig "extreme circumstances faced by the country").
To their credit, the Debtors gamely soldier on, noting that they "have already made substantial progress towards an alternative path out of chapter 11 by, among other things, developing a new business plan, engaging in discussions with their key stakeholders regarding a new chapter 11 plan of reorganization, and taking steps to reduce costs during these challenging economic conditions."
The extension motion explains, “As the Court is aware, in early March, the Debtors were on the cusp of emerging from these chapter 11 cases after the Court confirmed the Debtors’ Prior Plan, which plan would have enabled the Debtors to emerge successfully from chapter 11 by eliminating billions in dollars of debt and providing for new capital to fund the restructuring and the Debtors’ business going forward. The Prior Plan was the product of several months of hard work and careful planning by the independent special committee of the board of directors of the Company (the ‘Special Committee’) and the Debtors’ management team. The Debtors worked hard to achieve substantial support for the Prior Plan, including the acceptance of the plan from all voting classes and the support of the plan from most of their key stakeholders, including the official committee of unsecured creditors (the ‘Creditors’ Committee’), and ultimately confirmed the Prior Plan over objections raised by the ad hoc group of 1.125 Noteholders (the ‘Ad Hoc Group’) and Storey Minerals, Ltd., Maltsberger/Storey Ranch LLC, Rene R. Barrientos, Ltd. (‘MSB’).
Unfortunately, in the days following the Court’s oral ruling confirming the Prior Plan on March 6, 2020, Saudi Arabia initiated a price war with Russia that severely affected the price of oil and gas, causing United States oil prices to fall by more than 30%. At the same time, the spread of COVID-19 resulted in the crash of financial markets. As a result of these events, the Debtors were unable to consummate the Prior Plan and subsequently agreed to terminate the backstop commitment agreement (the ‘Backstop Agreement’) and the plan support agreement (the ‘Plan Support Agreement’) with the Backstop Parties.
Consequently, the Court vacated the Prior Plan.
Despite these challenging economic conditions, the Debtors have been and remain focused on the resolution of these chapter 11 cases. Since the Court vacated the Confirmation Order, the Debtors have already made substantial progress towards an alternative path out of chapter 11 by, among other things, developing a new business plan, engaging in discussions with their key stakeholders regarding a new chapter 11 plan of reorganization, and taking steps to reduce costs during these challenging economic conditions. Notwithstanding this progress, given the short period of time that passed since March, the Debtors require time to negotiate and prosecute a new chapter 11 plan with their creditors.”
At a March 23rd hearing, the Southern District of Texas's celebrated Judge Marvin Isgur commented, "I find that the Plan as confirmed could not go effective because of the extreme circumstances faced by the country and the change of oil prices… all parties agree that it cannot realistically proceed…this situation is just such that it has to be from an economic point of view…so we will vacate it on that basis…"
In addition to the order vacating the Plan's confirmation, Judge Isgur also signed an amended stipulation order approving the settlement that terminated the Debtors' Plan Support Agreement (the “PSA”) and Backstop Commitment Agreement (the "BCA”), each dated October 18, 2019 (see further below) [Docket No. 1104]
On March 6, 2020, the Court had confirmed the Debtors’ Fourth Amended Joint Chapter 11 Plan of Reorganization, semingly clearing the way for the Debtors to exit bankruptcy just about now and shed $3.3bn of pre-petition debt in the process. Even then, however, there were howls that the coronavirus pandemic and its powerful downward impact on energy prices had rendered the Plan, and the emerged Debtors, unviable. Judge Isgur, who ignored pleas for more time and expert examination of the impact of the coronavirus, will now face tough questions as to his judgment in the face of the virus and facts that are not only apparent with 20/20 vision but were clearly on hand when he confirmed the Plan.
On March 19, 2020, the Debtors and signatories to the PSA and BCA filed a stipulation asking the Court to approve a settlement that would amend and terminate each of those agreements [Docket No. 1090].
Without those agreements and the support of signatory stakeholders, including affiliates of Elliott Management Corporation, Apollo Asset Management, Avenue Capital Group and Access Industries, Inc (each in its capacity as a “Commitment Party" under the BCA and a “Supporting Noteholder” under the PSA) the Debtors’ Plan as confirmed on March 12th was effectively dead.
Keys terms of the stipulation include (i) the elimination of any termination fee under either of the BSA or the PSA, (ii) the Debtors’ agreement to pay the fees of the Supporting Noteholders and the Commitment Parties until the date that the stipulation is approved BUT not thereafter, (iii) comprehensive mutual releases given by both sides (the Debtors on the one hand and the Supporting Noteholders/Commitment Parties on the other) in respect of “these chapter 11 cases, the BCA, the PSA, the Plan, the transactions contemplated by the BCA, the PSA, and the Plan, the termination of the BCA, the PSA, and the Plan, the purchase, sale, or rescission of the purchase or sale of any security, debt, or other obligations of the Debtors or the Reorganized Debtors…” and (iv) the agreement, through November 25, 2020, of each Supporting Noteholder or Commitment Party, not to contest “any restructuring of the Debtors; provided, that such restructuring provides treatment no less favorable to any Applicable Claim held by such Supporting Noteholder or Commitment Party than the treatment provided to other holders of 1.25L Notes Claims…1.5L Notes Claims…or Unsecured Claims.”
On March 16, 2020, just over a week after the Court hearing the EP Energy Corporation cases confirmed the Debtors' Fourth Amended Joint Chapter 11 Plan of Reorganization, brushing aside mounting concerns that the Plan was no long feasible in a post-coranavirus market, the Wall Street Journal began reporting that the holders of the Debtors 1.5L notes claims, who had otherwise agreed tp participate in a $475.0mn equity rights offering (a key part of the Debtors' exit financing plans), were backing off of that commitment and effectively pulling the plug on the Plan as confirmed.
From the WSJ: "Apollo Global Management Inc. and other firms are backing off a commitment to finance shale driller EP Energy Corp. ’s exit from chapter 11, people familiar with the matter said, the second major bankruptcy deal to falter over the turmoil in U.S. energy markets.
The investors, which own large chunks of EP Energy’s debt, went back on a $475 million commitment to purchase its equity under a court-approved chapter 11 strategy, these people said. Without the financing commitment, EP Energy lacks a clear path out of chapter 11 at a time when billions of dollars in capital have retreated from energy assets."
In a March 6th press release, the Debtors noted that, with the Court order, "The Company expects to complete its financial restructuring process and emerge from Chapter 11 bankruptcy protection as a private company in the coming weeks.
Upon emergence, the Company will reduce its debt by approximately $3.3 billion, will receive approximately $629 million in senior secured exit financing from the Company's existing revolving loan lenders, and approximately $325 million of new-money equity financing from certain of its existing noteholders. Such deleveraging and financing will ensure that EP Energy will have greater financial flexibility to support ongoing operations.
The Debtors' President and Chief Executive Officer Russell Parker added, “This milestone represents the commitment of our financial restructuring, which is being achieved on an expedited basis thanks to the support of our creditors and stakeholders and their confidence in our long-term value creation opportunities. Confirmation of our Plan enables EP Energy to begin taking the final steps in a process that will significantly reduce our debt and strengthen our capital structure. Based on the strength of our assets and our continued improvement on our operational execution and capital efficiency, EP Energy is poised to succeed in this operating environment and drive value for all our stakeholders.”
Objections and Coronavirus Concerns
In a Court filing filed by longstanding Plan critic "MSB Owners" the following (with brief hindsight, very rosy) assessment of the Debtors' near-term competitive environment was put to the Court: "This downturn has hit oil prices particularly hard. The downward pressure on economic activity, first in China and now elsewhere, is immediate and drastic in suppressing oil demand. At close of the market on January 21, crude oil was trading at the West Texas Intermediate index at $58.38 per barrel. By the close of business on February 28, 2020, the price had fallen to $44.76 per barrel, a decrease of 19.3%. The stock prices of oil and gas producers mirror this downturn. Exxon Mobil’s stock has slid from $67.58 to $51.44 in the same period for a loss of almost 24% in stock value. Other oil and gas producers have seen similar losses in stock value over the same period: Marathon Oil Corp., 35.5%; Chevron Corp., 17.7%, ConocoPhillips, 22.8%; EOG Resources, Inc. 24.7%; Devon Energy Corp., 35%. Indeed, every producer has seen a meaningful loss in value since COVD-19 began its grim march across the globe, with losses being even more significant when pegged to the late December 2019 disclosure of the virus in China (e.g., oil price decrease of 26.67%)….It appears undisputed that such evidence would be highly relevant to the feasibility of the Debtors’ Plan.
While the Debtors are substantially hedged for 2020 and thus substantially insulated from near term price declines, the early price forecasts for 12 months from now are plainly bearish. This would preclude Debtors from replacing the hedges with a $60/bbl strike price contract. Indeed, Debtors will need to adjust to $46/bbl oil [with commensurate differentials lower for the waxy Uinta crude that itself has higher transportation costs due to the need for trucking and heat].”
To give a sense of just how far those figures have shifted in recent days, crude oil at the West Texas Intermediate Index was just above $32 in early trading on March 9th; and pre-market Exxon Mobil stock was trading under $43 per share.
Plan Support Agreement
The Disclosure Statement provides: “On October 18, 2019, the Debtors entered into the Plan Support Agreement, a copy of which is annexed hereto as Exhibit B, with certain affiliates of, or funds managed by (a) Apollo Management Holdings, L.P. (‘Apollo’), (b) Elliott Management Corporation (‘Elliott’ and, together with Apollo, the ‘Initial Supporting Noteholders’), (c) Access Industries, Inc. (‘Access’), and (d) Avenue Capital Group (‘Avenue’, and collectively with the Initial Supporting Noteholders and Access, the ‘Supporting Noteholders’). The Plan Support Agreement provides that the parties thereto will support the Plan and the restructuring transactions contemplated thereby, subject to the terms and provisions of the Plan Support Agreement. In addition, in the Plan Support Agreement, the Debtors have agreed to move forward expeditiously with confirmation and consummation of the Plan, and to be subject to certain milestones set forth below which, if not achieved, enable the Supporting Noteholders to terminate the Plan Support Agreement.
Backstop Support Agreement
The Disclosure Statement provides: “On October 18, 2019, the Debtors also entered into the Backstop Commitment Agreement, pursuant to which the Supporting Noteholders have committed to (i) purchase New Common Shares at a 35% discount to a “Stated Equity Value” of $900 million for cash consideration of $325 million (which shall be reduced dollar-for-dollar for cash proceeds received in the 1.5L Rights Offering) (the “Cash Purchase Obligation”), and (ii) exchange $138 million of Reinstated 1.25L Notes for New Common Shares issued at a 25.7% discount to a Stated Equity Value of $900 million (the “Exchange Transaction”).
In consideration of the Commitment Parties’ commitments under the Backstop Commitment Agreement, the Backstop Commitment Agreement provides that the Debtors shall provide to the Commitment Parties: (i) a commitment premium of $26 million of additional New Common Shares (the “Backstop Commitment Premium”), earned upon entry of the order approving the Backstop Commitment Agreement, and payable on the effective date of the Exit Facility (the “Closing Date”) at the Cash Purchase Price (as defined in the Backstop Commitment Agreement); (ii) if the Backstop Commitment Agreement is terminated as the result of the occurrence of certain specified conditions set forth in the Backstop Commitment Agreement, a termination fee in cash in an amount equal to $26 million (the “Termination Fee”); (iii) the reimbursement of the Supporting Noteholders’ and their advisors’ reasonable and documented out-of-pocket fees and expenses (the “Reimbursement Obligations”);15 and (iv) an indemnification against any and all losses, claims, damages, liabilities and costs and expenses arising out of or in connection with the Backstop Commitment Agreement and the transactions contemplated thereunder.
Overview of the Confirmed Plan
The Debtors provided the following overview: "The Plan provides for a comprehensive restructuring of the Company’s balance sheet and a significant investment of capital in the Debtors’ business. The transactions contemplated in the Plan will strengthen the Company by substantially reducing its debt and increasing its cash flow on a go-forward basis, and preserve in excess of 500 jobs. Specifically, the proposed restructuring contemplates, among other things:
- a reduction of current debt on the Debtors’ balance sheet by approximately $3.3 billion,
- a $475 million equity rights offering (the '1.5L Rights Offering') made available to eligible holders of Allowed 1.5L Notes Claims as described more fully below, $463 million of which is being backstopped by the Supporting Noteholders (as defined below),
- a $25 million equity rights offering (the 'Unsecured Rights Offering'; together with the 1.5L Rights Offering, the 'Rights Offerings') made available to eligible holders of Allowed Unsecured Claims as described more fully below,
- access to an approximately $629 million exit credit facility (the 'Exit Facility'), which RBL Lenders holding 100% of the Claims under the Debtors’ prepetition RBL Facility have committed to provide support for, and which the Debtors’ prepetition RBL Facility and postpetition DIP Facility will “roll” into on the effective date of the Plan ('Effective Date')."
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