February 23, 2021 – The Debtors filed a revised Disclosure Statement with an attached redline showing changes to the version filed on November 24, 2020 [Docket No. 817].

On February 24th, the Court hearing the Gulfport Energy Corporation cases issued an order approving the Debtors’ (i) Disclosure Statement, (ii) proposed Plan solicitation and voting procedures and a (iii) proposed timetable culminating in a April 7th confirmation hearing [Docket No. 831]. 

The solicitation materials are to include a letter from the Debtors' Official Committee of Unsecured Creditors' (the "Committee") to unsecured creditors and outlining its objections to the Plan and urging those creditors to withhold their support. As of February 24th, that "Committee Letter," to be attached to the Disclosure Statement at Exhibit 14, has not been filed with the Court.

The heavily amended Disclosure Statement reflects the full-throated February 16th objection of the Committee (see more on objection below) to the Plan; mostly with health warnings about the Committee's lack of support but also by splitting Class 5 (notes claims) into two sub-classes. The Committee had argued that (i) a single class was entirely inappropriate given disparate treatment of creditors holding Parent interests and those holding interests in a subsidiary and (ii) that the disclosure as to the disparate treatment was deliberately obtuse. The bifurcation of the class would seemingly address some of the Committee's concerns; although the Debtors' presentation of aggregate class amounts and projected recoveries (The aggregate amount of claims is $1,823.0mn and the estimated recovery is 42.9–71.4% for both sub-classes, suggestive that both sub-classes are in line for equal recoveries) may continue to draw Committee ire.

As to health warnings, the Disclosure Statement now includes lengthy insertions from the Committee covering several of their most important concerns, most notably (i) the Debtors' June 2019 "Drop Down Transaction," whereby the Debtors transferred an estimated $1.0bn of leasehold interests in the Utica Shale away from the Debtors’ parent entity – Gulfport Energy Corporation (the ‘Parent’ or ‘GPOR’) – to its subsidiary, Gulfport Appalachia LLC, at a time when both the Parent and the subsidiaries were likely insolvent (if this were held to be the case that $1.0bn of value shifting back to the parent) and (ii) over $19.6mn of management bonuses paid in the eight months preceding the Debtors' Chapter 11 filings and whether those bonuses should now be clawed back.

Plan Overview

The Disclosure Statement [Docket No. 817] reads: “The Restructuring Support Agreement and Plan contemplate the following: 

• DIP and Exit Financing. The RBL Lenders, with the Bank of Nova Scotia as administrative agent (the “DIP Agent”), will provide the $262.5 million DIP Facility, that will “roll up” a portion of the existing RBL Facility and provide sufficient liquidity for the Debtors to operate while in chapter 11. The RBL Lenders have agreed that the RBL Facility and DIP Facility will convert into an exit financing facility (the “Exit Facility”) upon the effective date of the Plan (the “Effective Date”) subject to the terms and conditions set forth in the Exit Facility Term Sheet.
• New Money Equity Rights Offering. The Ad Hoc Noteholder Group has agreed to backstop a new money rights offering of at least $50 million (the “Rights Offering”), in exchange for New Preferred Stock.
• Treatment of Unsecured Claims.The holders of unsecured claims against the Debtors (including bondholder claims, rejection damages claims and litigation claims) will receive in the aggregate 100% of the equity of the Reorganized Debtors (prior to the Rights Offering and subject to dilution by the Management Incentive Plan) and $550 million of New Unsecured Notes, depending on whether the Holder’s claim is against Gulfport Parent or one of its subsidiaries as described further below.
  1. Holders of Notes Claims and General Unsecured Claims against Gulfport Subsidiaries will share in an equity pool consisting of 94% of the equity of the Reorganized Debtors (prior to the Rights Offering and subject to dilution by the Management Incentive Plan) and will receive Rights Offering Subscription Rights and New Unsecured Notes.
  2. Holders of Notes Claims and General Unsecured Claims against Gulfport Parent will share in an equity pool consisting of 6% of the equity of the Reorganized Debtors (prior to the Rights Offering and subject to dilution by the Management Incentive Plan). Holders of Notes Claims will waive recoveries from Gulfport Parent to the extent such Holders have, in the aggregate, received 94% of the equity of the Reorganized Debtors (prior to and not including any dilution by the Management Incentive Plan or any conversion of New Preferred Stock into New Common Stock) until Holders of General Unsecured Claims receive New Common Stock with a value sufficient to satisfy their General Unsecured Claims against Gulfport Parent in full (based on Plan Value).
• Treatment of Intercompany Claims. The Plan and the distributions contemplated thereby constitute a global settlement of any and all Intercompany Claims and causes of action by and between any of the Debtors that may exist as of the Effective Date, and any and all Intercompany Claims will be cancelled on the Effective Date in exchange for the distributions contemplated by the Plan to Holders of Claims against and Interests in the respective Debtor entities. The Plan shall be considered a settlement of the Intercompany Claims pursuant to Bankruptcy Rule 9019
• Treatment of Intercompany Interests. Holders of Intercompany Interests shall receive no recovery or distribution and shall be Reinstated solely to the extent necessary to maintain the Debtors’ prepetition corporate structure for the ultimate benefit of the Holders of New Common Stock and New Preferred Stock.
• Treatment of Existing Equity Interests. The existing equity interests in Gulfport Parent will be canceled without any distribution."

The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):

• Class 1 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $22.0mn and the estimated recovery is 100%.
• Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $1.0mn and the estimated recovery is 100%.
• Class 3 (“RBL Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $442.0mn and the estimated recovery is 100%. Each Holder of an Allowed RBL Claim shall receive, at the option of each such Holder, either: (i) if such Holder elects to participate in the Exit RBL/Term Loan A Facility, its Pro Rata share of the Exit RBL/Term Loan A; or (ii) if such Holder does not elect to participate in the Exit RBL/Term Loan A Facility (including by not making any election with respect to the Exit Facility on the ballot), its Pro Rata share of the Exit Term Loan B Facility.
• Class 4A (“General Unsecured Claims Against Gulfport Parent, including Notes Claims against Gulfport Parent”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $218.0mn – $400.0mn and the estimated recovery is 3.6–19.8%. Each Holder of an Allowed General Unsecured Claim against Gulfport Parent shall receive, in full and final satisfaction of such Claim, its Pro Rata11 share of the Gulfport Parent Equity Pool; provided, however, that once the Holders of Notes Claims receive distributions of 94% of the New Common Stock (prior to and not including any dilution by the Management Incentive Plan or any conversion of New Preferred Stock into New Common Stock) in the aggregate on account of their Notes Claims against all Debtors, the Holders of Notes Claims shall waive any excess recovery on account of their Pro Rata share of the Gulfport Parent Equity Pool until Holders of Allowed General Unsecured Claims against Gulfport Parent have received New Common Stock with a value sufficient to satisfy their Allowed General Unsecured Claims against Gulfport Parent in full (based on Plan Value).
• Class 4B (“General Unsecured Claims against Gulfport Subsidiaries”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.0mn and the estimated recovery is 42.8–71.3%. Each Holder of an Allowed General Unsecured Claim against Gulfport Subsidiaries shall receive, in full and final satisfaction of such Claim, its Pro Rata13 share of the: (i) Gulfport Subsidiaries Equity Pool, (ii) Rights Offering Subscription Rights, and (iii) New Unsecured Notes.
• Class 5A (“Notes Claims against Gulfport Parent”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,823.0mn and the estimated recovery is 42.9–71.4%^FN16 (this recovery estimate includes Claims on account of Notes Claims against Gulfport Subsidiaries).  Each Holder of an Allowed Notes Claim against Gulfport Parent shall receive, in full and final satisfaction of such Claim, its Pro Rata15 share of the Gulfport Parent Equity Pool; provided, however, that once the Holders of Notes Claims receive distributions of 94% of the New Common Stock (prior to and not including any dilution by the Management Incentive Plan or any conversion of New Preferred Stock into New Common Stock) in the aggregate on account of their Notes Claims against all Debtors, the Holders of Notes Claims shall waive any excess recovery on account of their Pro Rata share of the Gulfport Parent Equity Pool until Holders of Allowed General Unsecured Claims against Gulfport Parent have received New Common Stock with a value sufficient to satisfy their Allowed General Unsecured Claims against Gulfport Parent in full (based on Plan Value); provided further, however, distributions to any Holder of a Notes Claim against Gulfport Parent shall be subject to the rights and terms of the Notes Indentures and the rights of the Notes Trustee to assert the Notes Trustee Charging Lien.
• Class 5B (“Notes Claims against Gulfport Subsidiaries”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,823.0mn and the estimated recovery is 42.9–71.4%^FN18 (this recovery estimate includes Claims on account of Notes Claims against Gulfport Parent). Each Holder of an Allowed Notes Claim against Gulfport Subsidiaries shall receive, in full and final satisfaction of such Claim, its Pro Rata^FN17 share of the: (i) Gulfport Subsidiaries Equity Pool, (ii) Rights Offering Subscription Rights, and (iii) New Unsecured Notes; provided, however, distributions to any Holder of a Notes Claim against Gulfport Subsidiaries shall be subject to the rights and terms of the Notes Indentures and the rights of the Notes Trustee to assert the Notes Trustee Charging Lien.
• Class 6 (“Intercompany Claims”) is unimpaired/impaired, presumed to accept/deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $388mn and the estimated recovery is N/A.
• Class 7 (“Intercompany Interests”) is unimpaired/impaired, presumed to accept/deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
• Class 8 (“Existing Interests in Gulfport Parent”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.
• Class 9 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $0 and the estimated recovery is 0%.

FN16 – Recoveries shown include value in respect of rights to participate in the Rights Offering. The low end of the recovery estimate assumes the low end of the range of estimated Enterprise Value. The high end of the recovery estimate assumes the high end of the range of estimated Enterprise Value.

FN17- In this instance, the Pro Rata amounts shall be calculated as the Pro Rata share of all General Unsecured Claims against Gulfport Subsidiaries and Notes Claims against Gulfport Subsidiaries.

FN18 – Recoveries shown include value in respect of rights to participate in the Rights Offering. The low end of the recovery estimate assumes the low end of the range of estimated Enterprise Value. The high end of the recovery estimate assumes the high end of the range of estimated Enterprise Value.

Committee Objection

On February 16, 2021, the Committee objected to the Debtors’ Disclosure Statement, arguing that the Debtors' are using "glaring deficiencies" to obscure "an unfortunate truth that unsecured creditors of the parent will receive de minimis recoveries" and fail to rationalize this inequitable and disparate treatment [Docket No. 768]. In December, the Committee threw another laundry list of objections at the Debtors' requested DIP financing; an effort that fail to move the Court.

In this objection, the Committee focuses on its contention that: 

(i) in June 2019, the Debtors transferred well over a billion dollars of leasehold interests in the Utica Shale away from the Debtors’ parent entity – Gulfport Energy Corporation (the ‘Parent’ or ‘GPOR’) – to its subsidiary, Gulfport Appalachia LLC, at a time when both the Parent and the subsidiaries were likely insolvent (the ‘2019 Dropdown Transaction’); 

(ii) that the Debtors have failed, then and now, to adequately describe the "shrouded in secrecy" 2019 Dropdown Transaction which could give rise to valuable estate claims based on potential fraudulent transfer litigation (instead planning to release for no consideration these claims); 

(iii) [to make sure that the Debtors' management sits up and takes notice] that management improperly received $20.0mn in bonuses in advance of the Debtors' Chapter 11 filings; 

(iv) that the Debtors are trying to glide over a key distinction (ie, whether an unsecured creditor has a claim against the Parent or a subsidiary) and allowing the former to believe they might be receiving the recovery of the latter and 

(v) that the Debtors are improperly grouping the very differently treated two in a single class (Class 4A).

The Committee’s objection states: “The Debtors’ Disclosure Statement contains glaring deficiencies and misleading statements regarding the proposed treatment for unsecured creditors under the RSA Plan. Rather than inform unsecured creditors of the parent Debtor, in straightforward terms, that their recoveries will be but a tiny fraction of those of subsidiary unsecured creditors, the Disclosure Statement obfuscates, implying that all unsecured creditors will share in a common pool. And, having obscured the unfortunate truth that unsecured creditors of the parent will receive de minimis recoveries, the Disclosure Statement then fails to clearly describe the supposed rationale for such disparate treatment. These deficiencies would appear to be just the latest example of these Debtors’ unwillingness or inability to provide their stakeholders with information necessary to make informed judgments. For the Court’s benefit, the Plan’s proposed treatment of various unsecured creditors is largely the result of a series of transactions undertaken by the Debtors a little over a year before commencing these bankruptcy cases. In June 2019, the Debtors transferred well over a billion dollars of leasehold interests in the Utica Shale away from the Debtors’ parent entity – Gulfport Energy Corporation (the ‘Parent’ or ‘GPOR’) – to its subsidiary, Gulfport Appalachia LLC, at a time when both the Parent and the subsidiaries were likely insolvent (the ‘2019 Dropdown Transaction’). The end result of the Debtors’ efforts was twofold. Those parties with whom the Debtors historically contracted for services, primarily midstream providers, rig operators and gatherers, were left with rejection damage claims against an entity with significantly depleted assets. Meanwhile, creditors of the subsidiaries, including the noteholders who have the benefit of subsidiary guarantee claims, benefitted by the value of the leasehold interests in the Utica Shale at the subsidiary level being isolated almost exclusively for their benefit. Based on the Committee’s investigation to date, it would appear the Debtors made no public disclosure of the 2019 Dropdown Transaction either prior to or at the time of its consummation, and subsequently made only passing reference to the billion dollar transaction in their Form 10-Q, noting simply that ‘Effective June 1, 2019, the Parent contributed interests in certain oil and gas assets and related liabilities to certain of the Guarantors.’… Notably, the Disclosure Statement itself fails to even mention the 2019 Dropdown Transaction, nor does it disclose the Debtors’ motivations behind these transactions.

Despite the shroud of secrecy that surrounds them, the 2019 Dropdown Transaction and other prepetition transactions have all but dictated the course of these cases. In the wake of the 2019 Dropdown Transaction and a series of other questionable transactions – including the Debtors’ ill-advised derivatives strategy that resulted in the company being out-of-the money by over $180 million on a mark-to-market basis as of the petition date – the Debtors engaged in negotiations with their revolving credit facility lenders and certain unsecured noteholders (the ‘RSA Parties’), ultimately striking a deal, the result of which is the RSA Plan. Under the RSA Plan, the Debtors put forth an allocation of value which results in the noteholders’ receipt of almost all of the distributable value (to the detriment of other unsecured creditors) and, in turn, the RSA Parties have agreed to ‘settle’ and/or release valuable estate claims, including those relating to the 2019 Dropdown Transaction and other intercompany claims, as well as claims against management related to $20 million of cash bonuses paid to the Debtors’ executives in contemplation of these bankruptcy cases. 

Having successfully divested the Parent of its leasehold interests, the Debtors and the RSA Parties now appear poised to use these cases to release, without adequate consideration, valuable claims that could potentially address the unfair treatment of the Parent unsecured creditors. Perhaps not surprisingly, the Disclosure Statement is entirely devoid of any description of these estate claims and the impact of their purported settlement and release through the Plan. Nor does the Disclosure Statement adequately inform unsecured creditors of what they could receive if any of these claims were successfully pursued. The 2019 Dropdown Transaction could well give rise to significant fraudulent transfer litigation that, if successful, could dramatically improve recoveries to Parent creditors. In addition, avoidance of the executive bonus payments, seemingly ratified by the RSA Parties, would materially increase creditor recoveries. The Disclosure Statement likewise fails to even describe whether these transactions were or are under investigation by the Debtors, and makes no mention of the Committee’s investigation into these transactions or others, including other prepetition asset divestitures, facts giving rise to potential claims for substantive consolidation, potential breaches of fiduciary duty by Debtors’ current and former officers and directors and certain questionable stock and debt buybacks. 

These estate claims have the potential to significantly impact the allocation of value among the various unsecured creditors, and in many instances could bring material assets into the estates.  Moreover, the Disclosure Statement does not describe unsecured creditor recoveries in any real detail. To the contrary, it appears the Debtors hope to obscure the disparate treatment of Parent unsecured creditors by stating that ‘holders of unsecured claims against the Debtors . . . will receive, as applicable, 100% of the equity of the Reorganized Debtors (prior to the Rights Offering) and $550 million of New Unsecured Notes, depending whether the Holder’s claim is against Parent or one of its subsidiaries.’ Disclosure Statement…To be clear, and despite this opaque description, general unsecured creditors of the Parent are not receiving any New Unsecured Notes and are receiving only up to some 6% of the new equity, before adjusting for dilutive effects of the Rights Offering and management incentive plan…In addition to the foregoing disclosure deficiencies, the RSA Plan improperly classifies the unsecured claims of the noteholders together with the other general unsecured claims of the Parent in a single class, Class 4A…Unlike the Notes Claims, most other unsecured claims at the Parent do not have the benefit of subsidiary guarantee claims. Under the RSA Plan, which does not ascribe any material value to the Parent’s avoidance of the 2019 Dropdown Transaction, Parent-only unsecured creditors would be entitled to a much lower recovery than Notes Claims. For this and other reasons described in the Rule 3013 Motion, the noteholder claims are not substantially similar to the other unsecured claims at the Parent and should not be classified together.”

Further evidence that the claims are not substantially similar is that, under the RSA Plan, Notes Claims will not receive any distribution from the Parent if noteholders receive a minimum level of recovery on account of their subsidiary guaranty claims. Notwithstanding their waiver of a recovery from the Parent, the Debtors have classified the noteholders in Class 4A at the Parent to facilitate (or dictate) a vote in favor of the RSA Plan by Class 4A and thereby avoid the requirement that the Plan not unfairly discriminate under 11 U.S.C. 1129(b). This is important, as the RSA Plan awards the Notes Claims and other unsecured creditors of the subsidiary guarantors recovery in the form of (i) take-back debt, (ii) the valuable ability to participate in a rights offering to purchase preferred shares at a discount, and (iii) their pro rata share of 94% of the reorganized equity. Parent-only unsecured creditors are limited to receiving only up to 6% of the reorganized equity, an equity whose value is diminished by the issuance of unsecured notes and preferred shares. Unless the RSA Plan is revised to address this blatant engineering of votes, the Disclosure Statement should not be approved.”

Key Documents

On March 23, 2021, the Debtors filed Plan Supplement to their Plan of Reorganization [Docket No. 958], and attached the following exhibits:

• Exhibit A: New Organizational Documents
• Exhibit B: Members of the New Board
• Exhibit C: Schedule of Rejected Executory Contracts and Unexpired Leases
• Exhibit D: Schedule of Proposed Cure Amounts
• Exhibit E: Schedule of Retained Causes of Action
• Exhibit F: Exit Facility Loan Agreements
• Exhibit G: Restructuring Steps Memorandum
• Exhibit H: New Unsecured Notes Indenture

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