Times are tough, very tough, for many mid-cap and small-cap exploration and production (“E&P”) companies. Crude oil prices have fallen from more than $100/barrel in July 2014 to a twelve-year low of less than $30/barrel in January 2016. Natural gas prices are at a three-year low. The growing consensus is that depressed prices will experience a slow recovery that may continue into the 2020s. In response, a number of overleveraged E&P companies have completed significant out-of-court restructurings since 2015, while others have filed for bankruptcy protection. Even those companies that have deleveraged their balance sheet and reduced their overall interest expense may face a liquidity crisis if commodity prices remain depressed through 2016 and beyond.
The significant, prolonged decline in commodity prices hurts E&P companies in two significant ways—first, by forcing a reduction in development activities that are unprofitable in low price environments, and second, by limiting access to capital through traditional reserve-based lending (“RBL”) financing. Overleveraged companies, especially those with significant senior unsecured debt, feel these effects more acutely. One telling sign is the disclosure by certain E&P companies in periodic filings with the Securities and Exchange Commission (the “SEC”) that they would not be able to pay contractual obligations as they became due in 2015 unless the company could complete a restructuring transaction.
The key question that these companies face is—what are the best strategic options to survive the depressed price market? While a restructuring often involves many elements, the most notable development in 2015 in out-of-court restructurings has been the use of junior lien financings and “uptiering” transactions in which companies offered a new security, often a second- or third-lien debt security or term loan, in exchange for cash or for existing senior unsecured debt.
To read the full alert click on the PDF below.