Whiting Petroleum Corporation – Still Fuming, Convertible Notes Trustee Objects to Disclosure Statement Citing Inadequate Information and the “Troubling Background of these Cases”

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June 5, 2020 – The Delaware Trust Company, as successor indenture trustee (“Convertible Notes Trustee”) for the Debtors' 1.25% convertible senior notes due 2020 (the “Convertible Notes,” principal $190.0mn) objected to the Debtors’ Disclosure Statement, arguing that "fatal confirmation issues exist and, if they are not resolved, will be prosecuted by the Convertible Notes Trustee in connection with confirmation of the Plan [Docket No. 414]. Key amongst the many Plan "infirmities" cited by the Convertible Notes Trustee is the Plan's requirement that "holders of Convertible Notes and other General Unsecured Claims make numerous concessions that benefit other constituencies equal or junior in priority and the failure of the Disclosure Statement to provide "disclosure regarding key economic factors that those creditors would need to evaluate before making any informed decision on the Plan."

What really seems to be irking the Convertible Notes Trustee, however, is the rough handling holders of Convertible Notes received prior to the Debtors' Chapter 11 filing, when, on the April 1st maturity date of those notes, those holders were left feeling the fool by the Debtors who opted fo file for Chapter 11 protection rather than make good on the $190.0mn payment of principal. The Debtors' decision to avoid the payment (see "Events Leading to the Chapter 11 Filings," below) came at the urging of an ad hoc group of the Debtors’ unsecured noteholders (the 'Ad Hoc Group') which "strongly opposed" the $190.0mn payment (the Convertible Notes were trading between 50 and 70 cents following the March 9 oil price collapse) and urged "a comprehensive restructuring premised on a debt-for-equity swap that would leave the holders of the Debtors’ convertible notes and senior unsecured notes with substantially all of Whiting’s equity."

In highlighting "the troubling…background of these cases," the Convertible Notes Trustee not only points to broken promises as to the April 1st payment of principal, but payments to other stakeholders, including a $22.0mn interest payment in respect of the Debtors' 2021 Senior Notes and $14.6mn of compensation awarded top executives. These payments are amongst a laundry list of issues that the Convertible Notes Trustee wants the Court to examine and which they threaten to make considerable noise about. 

The objection states, “On April 23, 2020 — just over three weeks into these Chapter 11 Cases and just over one month since they first considered a bankruptcy filing — the Debtors filed their Plan and Disclosure Statement. The Plan resulted from negotiations between the Debtors and the Ad Hoc Committee of Noteholders — a group that primarily holds 2021 Senior Notes, 2023 Senior Notes, and 2026 Senior Notes (collectively, 'Senior Notes'). Among other infirmities, the Plan requires that holders of Convertible Notes and other General Unsecured Claims make numerous concessions that benefit other constituencies equal or junior in priority, and the Disclosure Statement provides little to no disclosure regarding key economic factors that those creditors would need to evaluate before making any informed decision on the Plan.

The lack of disclosure is especially troubling given the background of these cases. By the Debtors’ own admissions, as of mid-March 2020, the Debtors intended to pay the Convertible Notes upon their April 1, 2020 maturity. According to the Debtors, they “ended 2019 standing on solid ground.” Even after the COVID-19 pandemic had emerged and its impending impact on the Debtors was clear, the Debtors, by their own admission, “fully expected to utilize availability under the RBL Facility to make the $190 million maturity payment of the convertible notes on April 1, 2020, which the Debtors believed would best position their enterprise to address their bond maturities in 2021, 2023, and 2026.”

The Debtors gave every indication that they would pay the Convertible Notes at maturity rather than file for chapter 11 protection, including: (i) on February 27, 2020, Whiting filed its annual 10-K with no qualification regarding its ability to continue as a going concern, (ii) on or about March 13, 2020, Whiting elected to pay approximately $22 million in interest due on the 2021 Senior Notes on March 15, 2020 rather than take advantage of a 30-day grace period available under the indenture governing those notes, (iii) on March 23, 2020, the Debtors drew down $650 million under the RBL Facility, while retaining an additional $678 million available to be drawn under the RBL Facility, and (iv) just days prior to the filing, the Whiting board of directors approved payments of $14.6 million to its top executives – insiders of the Debtors.

By their Plan, the Debtors ask holders of Convertible Notes and other General Unsecured Claims to make numerous concessions, including, among other things, agreeing to (i) accept a recovery consisting of zero cash and 97% of the equity in the reorganized company, (ii) consent to providing a junior interest class (current equity) with a recovery in the form of 3% of the equity in the reorganized company, (iii) allow a similarly-situated class of general unsecured creditors (the Trade Claims) to receive disparate treatment in the form of payment in full in cash, (iv) further dilution of their equity in the reorganized company on account of a Management Incentive Plan, and (v) sign off on estate releases to a broad list of parties.

Yet, the Disclosure Statement lacks information necessary for the holders of Convertible Notes and other General Unsecured Claims to make an informed judgment on their proposed treatment, including (i) the value of the equity in the reorganized company, (ii) a business plan that will reverse the operating cash burn the Debtors have experienced since the commencement of these Chapter 11 Cases such that the reorganized company’s equity will have value, and (iii) the existence of any claims and Causes of Action being released and the value provided to the estates on account of such releases.

The holders of the Convertible Notes are now left to evaluate a plan of reorganization for which there is woefully inadequate disclosure on many points, not the least of which is what they can expect their actual recovery to be under the Plan. Because the Disclosure Statement lacks sufficient disclosure on numerous issues, the Convertible Notes Trustee respectfully submits that it must be amended prior to solicitation of the Plan.

These issues include, but are not limited to:

  • Precisely what is being settled in the Plan Settlement and what is the business justification and mutual consideration for such settlement; 
  • What is the value of the claims being settled in the Plan and what investigation was conducted, and by whom, on the appropriateness of the settlement; 
  • What is the basis for the broad releases being offered under the Plan and what investigation was conducted, specifically with respect to transactions with the Hedge Counterparties, the $14.6 million of payments to insiders of the Debtors, the $22 million coupon payment, and other transactions occurring immediately prior to the Petition Date; 
  • What Retained Causes of Action are being preserved, especially with respect to the $14.6 million of payments to insiders of the Debtors and the Debtors’ repurchase of certain of the Convertible Notes in the months leading to the bankruptcy filing, and why a post-reorganization estate fiduciary is not being appointed to pursue the Retained Causes of Action on behalf of the Debtors’ current stakeholders;
  • What is the business justification for separately classifying the Trade Claims, who are receiving a full cash distribution, while the General Unsecured Claims that have the same priority as the Trade Claims are impaired and receiving unspecified value in the form of equity – and what mitigates against this being a vehicle to deliver an impaired consenting class in order to shift value to the out-of-the-money class of Existing Interests; 
  • What is the value of the post-confirmation equity being offered to the holders of General Unsecured Claims, along with evidence in the form of a valuation analysis and projections; and 
  • Whether the recovery under the Plan is greater than the recovery creditors would receive in a liquidation.

In addition to the infirmities in disclosing adequate information, approval of the Disclosure Statement should be denied due to the patent unconfirmability of the Plan on the grounds of, among others:

  • Impermissibly broad release and exculpation provisions
  • Improper segregation of the Trade Claims and the General Unsecured Claims and possible gerrymandering of these classes;
  • Impermissible discrimination against the General Unsecured Claims in the form of the different and less favorable treatment afforded to them vis-à-vis the Trade Claims; and
  • Violation of the absolute priority rule on account of the Existing Interests receiving a recovery on their equity while General Unsecured Claims are impaired.

Without addressing the foregoing inadequacies in the Disclosure Statement, informed voting by the General Unsecured Claims class is not possible. Moreover, fatal confirmation issues exist and, if they are not resolved, will be prosecuted by the Convertible Notes Trustee in connection with confirmation of the Plan.

Finally, the Convertible Notes Trustee objects to the Debtors’ request in the Disclosure Statement Motion to reimburse or pay when due all fees and expenses of the professionals retained by the Consenting Creditors. The Restructuring Support Agreement – a post-petition agreement that has not been approved by this Court – is not a sufficient basis for saddling the Debtors’ Estates with this additional administrative burden, particularly without any disclosure of, or justification for, such fees and expenses being paid by the Estates.”

Further Background

The following is a summary of classes, claims, voting rights, and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, a liquidation analysis has not yet been filed):

  • Class 1 ("Other Secured Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $[.] and expected recovery is 100%.
  • Class 2 ("Other Priority Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $[.] and expected recovery is 100%
  • Class 3 ("RBL Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $934.4mnFN and expected recovery is 100%. Each holder will receive payment in full in cash. FN: This figure accounts for certain setoffs taken relating to terminated Hedging Arrangements. Certain disputes remain outstanding, however, and this figure will be updated as such disputes are resolved.
  • Class 4 ("Trade Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $[.] and expected recovery is 100%
  • Class 5 ("General Unsecured Claims") is impaired and entitled to vote on the Plan. The aggregate amount of claims is at least $[2.368bn] and expected recovery is [.]%. Each holder will receive its pro rata share of the Claims Equity Pool (ie 97% of the emerged Debtors' equity).
  • Class 6 ("Intercompany Claims") is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is $[.] and expected recovery is 100% or 0%.
  • Class 7 ("Intercompany Interests") is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 100% or 0%
  • Class 8 ("Existing Interests") is impaired and entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
  • Class 9 ("Section 510(b) Claims") is impaired and entitled to vote on the Plan. The aggregate amount of claims is $[.] and expected recovery is [.]%.

Events Leading to the Chapter 11 Filings

In a declaration in support of first day motions (the "Stein Declaration"), Jeffrey S Stein, the Debtors' Chief Restructuring Officer, detailed the Debtors slide into bankruptcy. The Stein Declaration makes for a dramatic and plausible read (so we give you most of it) as to how a company more or less surviving the prolonged downturn in oil and gas prices that has claimed so many scalps could have its fortunes turned upside down overnight (the (“WTI”) index—"declined 24.59% in a single day" on March 9th) by the one-two punch of the Saudi/Russia price war and COVID-19. It also does an excellent job of walking readers through the board room thought process; from a company comfortably set to pay off debt as it matured…to one that could not; going so far as to draw $650.0mn from its senior credit facility before consulting with those lenders. No doubt that grab for cash coming with input from warring groups of bondholders fighting amongst themselves and collectively lining up against senior lenders (although the Stein Declaration does state that ultimately "Both the banks and the Ad Hoc Group…indicated their strong preference that the Debtors not make the maturity payment due on April 1, 2020 (those bonds trading at 50-70 cents on the dollar)). The Stein Declaration states: "

The Debtors ended 2019 standing on solid ground. While the Debtors had more than $1 billion in unsecured bond debt set to mature prior to December 2020, the Debtors had significant financial flexibility to restructure their capital structure. Most importantly, the Debtors began 2020 with a committed revolving credit facility that provided them with committed financing of up to $1.75 billion—more than enough liquidity to service the Debtors’ 2020 maturities and fund anticipated capital expenditure needs throughout the year. For these reasons, the Debtors secured a “clean” audit report as recently as February 27, 2020.

Through January and February 2020, the Debtors and their advisors focused on numerous potential alternatives, including merger and acquisition, sale, and consensual recapitalization options, to expand the size of their business enterprise and address their funded indebtedness, particularly their senior unsecured note maturities in 2021, 2023, and 2026.

The Debtors also began to evaluate potential liability management transactions (including a potential restructuring) to reduce their aggregate funded indebtedness, with the goal of addressing their funded debt maturities prior to December 2020, when the RBL Facility (as defined below) matures absent repayment of the Debtors’ senior unsecured notes due 2021.

Through this period of early evaluation, the Debtors fully expected to utilize availability under the RBL Facility to make the $190 million maturity payment of the convertible notes on April 1, 2020, which the Debtors believed would best position their enterprise to address their bond maturities in 2021, 2023, and 2026.

However, in the latter half of March 2020, drastic and unprecedented global events, including a “price war” between OPEC and Russia and the macroeconomic effects of the COVID-19 pandemic, forced the Debtors to move quickly to reevaluate their financial position and immediate next steps. On March 9, 2020, the West Texas Intermediate (“WTI”) index—the benchmark for U.S.-based oil exploration and production companies—declined 24.59% in a single day. Since mid-March, major oil indexes experienced numerous subsequent drops and U.S. indexes have hovered around $20 per barrel—a level unseen in nearly twenty years. 

The recent extreme and sudden downturn fundamentally changed the economic landscape surrounding the Debtors’ deleveraging options. Whiting and its Board of Directors immediately snapped into action to address the unprecedented situation. On March 19, 2020, the Board of Directors conferred with the Debtors’ management team and advisors regarding their options. Thereafter, the Board of Directors, in a sound exercise of its fiduciary duties, directed the Debtors to draw down an amount under the RBL Facility sufficient to ensure that the Debtors had more than adequate liquidity to operate through 2020.

On March 23, 2020, the Debtors drew down $650 million from the RBL Facility. Immediately thereafter, the Debtors commenced discussions with the RBL Lenders regarding the Debtors’ anticipated path forward. The Debtors also engaged with an ad hoc group of the Debtors’ unsecured noteholders (the 'Ad Hoc Group') represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP, as legal counsel, and PJT Partners, LP, as financial advisor. The Debtors’ discussions with the RBL Lenders and the Ad Hoc Group included whether to pay off the 2020 convertible notes (which were trading between 50 and 70 cents following the March 9 oil price collapse) at maturity on April 1, 2020, which the Ad Hoc Group informed the Debtors in writing its members strongly opposed, in favor of a comprehensive restructuring premised on a debt-for-equity swap that would leave the holders of the Debtors’ convertible notes and senior unsecured notes with substantially all of Whiting’s equity.

The Debtors and the Ad Hoc Group also began to engage regarding a potential comprehensive restructuring transaction. To facilitate these discussions, several members of the Ad Hoc Group became restricted under confidentiality agreements and the Debtors provided requested diligence to the Ad Hoc Group and its advisors. The Debtors and the Ad Hoc Group ultimately exchanged numerous term sheets regarding a consensual debt-for-equity exchange to be implemented pursuant to a prearranged chapter 11 plan of reorganization. 

In response, Whiting’s Board of Directors focused on whether to pay the 2020 convertible notes at maturity on April 1, 2020. The Board of Directors evaluated, among other things, the Debtors’ ability to satisfy in full roughly $2.2 billion in unsecured note maturities between late 2020 and 2026, including nearly $775 million in December 2020 to avoid a springing maturity on the RBL Facility. The Board of Directors also considered the possibility that the RBL Lenders may reduce the Debtors’ borrowing base (which is set for redetermination each May 1 and November 1). The Board of Directors believed that such a reduction might limit the Debtors’ flexibility to use any remaining availability under the RBL Facility to satisfy their funded debt obligations. Also relevant was the fact that the RBL Facility would mature at the end of 2020 absent the payment in full or refinancing of the 2021 notes. Finally, the Board of Directors weighed the views of the Debtors’ major funded debt stakeholders, which, as noted above, opposed paying off the convertible notes and instead favored a comprehensive restructuring. Ultimately, the Board of Directors, in a sound exercise of its fiduciary duties and upon the advice of the Debtors’ advisors, elected to forego the $190 million maturity payment on the convertible notes on April 1, 2020."

 Significant Shareholders

  • State Street Corporation – SSGA Funds Management, Inc.: 16.3%
  • Black Rock, Inc.: 15.5% 
  • The Vanguard Group: 10.72% 
  • FMR LLC: 8.731% 
  • Dimensional Fund Advisor LP: 7.52%
  • Hotchkis and Wiley Capital Management, LLC: 5.46%

About the Debtors

According to the Debtors: "Whiting Petroleum Corporation, headquartered in Denver, Colorado is one of the largest independent exploration and production companies in the USA with an oil focused asset base. We control one of the largest acreage positions in the Bakken/Three Forks resource play in the Williston Basin of North Dakota and Montana with 476,332 net acres in the oil productive sweet spots of the basin. From the Bakken and Three Forks resource play we have consistently been a top oil producer in North Dakota and across the Williston Basin. In the new and large oil prone sweet spot of the eastern DJ Basin of Colorado, we have 84,607 net acres.

About the Debtors

According to the Debtors: “Whiting Petroleum Corporation, headquartered in Denver, Colorado is one of the largest independent exploration and production companies in the USA with an oil focused asset base. We control one of the largest acreage positions in the Bakken/Three Forks resource play in the Williston Basin of North Dakota and Montana with 476,332 net acres in the oil productive sweet spots of the basin. From the Bakken and Three Forks resource play we have consistently been a top oil producer in North Dakota and across the Williston Basin. In the new and large oil prone sweet spot of the eastern DJ Basin of Colorado, we have 84,607 net acres.”

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