By: P. A. (Andy) Weber III, Corner Capital
As downstream energy advisors, Corner Capital stays current on major news and legal cases within the entire industry. With the decline in oil prices, and many upstream oil companies threatened with bankruptcy, it is enlightening to see a success story. Gulf Rig supplier Hercules Offshore Inc. is on track to become the first big-energy sector company to exit bankruptcy in the current oil slump (Hercules Offshore Inc., 15-11685, US Bankruptcy Court, District of Delaware (Wilmington).
While downstream companies are enjoying long margins and strong profitability, obviously our upstream brethren are not so fortunate. The strategy employed by Hercules reminds us that future challenges in downstream can be managed through good communication and a clearly developed plan.
Since last October, when oil prices dropped over 40%, six oil and gas companies have filed for bankruptcy including American Eagle Energy Corp. of CO and Dune Energy, a Houston-based oil and gas explorer with operations in TX and LA. Debt service, which is over 10%+ of revenue, is often the culprit as well as poorly performing gas service bonds in the high-yield energy index. Most recently, Sabine Oil & Gas Corp. sought Chapter 11 bankruptcy protection, making it the sixth and largest US oil producer to file as a result of cheap oil prices.
Hercules started strategizing before there was even default, spending months negotiating with creditors before filing for bankruptcy. This accomplished two things: it showed the court good faith that the company was taking their situation seriously, and it allowed a lot of kinks to be worked out before the court was even part of the equation, drastically speeding up the process. By taking such a pro-active approach to their situation, it eliminated friction that often occurs when a lender notices a missed payment and receives no explanation from the borrower.
In their negotiations, Hercules worked closely with their noteholders to create a favorable deal on all sides. The result is that when the case was presented to the bankruptcy court, all the creditors were already appeased. The only thing the court had to analyze was the fairness and legality of the proposed solution.
Be Willing to Negotiate
Though most of the particulars were ironed out before Hercules filed for bankruptcy, there were a couple of hiccups in court. The office of the US Trustee contested the company’s request for exculpation, which would prevent the company from being sued in the future. When presented with this dilemma, Hercules’ legal team was willing to work with the court and amend their plan to be acceptable.
This strategic and level-headed approach means that Hercules spent less than two months in Chapter 11 bankruptcy and will bounce back with the funds to complete an important oil rig project. They are in favorable standing with their creditors and will not need bankruptcy financing to stay on top of their bills. More importantly, they should be able to compete more effectively in this environment after proactively restructuring their balance sheet to fit the current battlefield of crude prices.
Corner Capital provides transactional and advisory services to the Downstream Energy Industry. Our team of seasoned advisors would love to talk with you and discuss your business needs, whether for the sale of your business, for growth capital, or for working with your creditors. Our industry experience and awareness allows us to not only analyze outside cases such as this one, but to analyze our clients’ situations, bringing our expertise to bear in Downstream Energy. In addition, our firm has a vested interest in following the Upstream E&P and Oil Field Services Industries, as many of our clients serve these constituencies.