Turnaround Talk: Many Energy Companies Flirt with Bankruptcy and May Run Out of Options

UPDATED — The on-going price volatility of oil and gas is taking a toll on energy companies, many of which are reassessing their balance sheets in search of solutions to avoid bankruptcy. Recently, several companies, including Energy XXI Ltd. (NASDAQ: EXXI), Peabody Energy Corp. (NYSE: BTU), SandRidge Energy Inc. and Vaalco Energy (NYSE: EGY), have indicated concerns regarding their ability to continue operations. Meanwhile, debt exchanges, which have been helpful in buying more time in the past, may no longer be sufficient, says Fitch Ratings.

Additionally, Foresight Energy (NYSE: FELP) and Linn Energy (Nasdaq: LINE) have both recently provided updates to investors on their troubled financial states.

St. Louis, Missouri-based Foresight, which was acquired by Murray Energy in 2015, has extended an existing forbearance agreement for its 7.875 percent senior notes due to mature in 2021. Originally entered into on Dec. 18, 2015, the forbearance agreement, which allows the coal producer to delay an interest on the debt, will now expire April 12.

“The extensions are intended to provide additional opportunity to engage in discussions and negotiations with the holders of the notes and our secured lenders,” Foresight says in an April 6 Securities and Exchange Commission filing.

In Linn Energy’s case, the Houston, Texas petroleum, natural gas, and natural gas liquids exploration and production company says that it has reached an agreement with a large group of its lenders. The arrangement allows for the continuation of “good faith negotiations” regarding the terms of a potential comprehensive and consensual restructuring, which could include a Chapter 11 filing, the company states in an April 5 document filed with the SEC.

SandRidge Energy, an Oklahoma City oil and gas exploration and production company, made an over-due interest payment to investors on March 15, after delaying $50.1 million to holders of its 7.5 percent senior notes due 2023, and 7.5 percent senior convertible notes due 2023, a payment that was due Feb. 16. The move was made to “preserve liquidity and flexibility,” says SandRidge, but may not be enough to stabilize the company financially.

SandRidge revealed a dismal outlook in its annual 10-K report with the SEC for the year ended Dec. 31, 2015, filed March 29. “The company has engaged advisors to assist with a private restructuring or reorganization under Title 11 of the U.S. Bankruptcy Code in the foreseeable future, which raises substantial doubt about its ability to continue as a going concern,” Sandridge says. Kirkland & Ellis LLP is SandRidge’s legal adviser and Houlihan Lokey Inc. (NYSE: HLI), acts as its financial adviser.

Houston’s Energy XXI, an oil and natural gas development and production company that relies heavily on acquisitions, issued a warning to investors in early March. “Absent a material improvement in oil and gas prices, or a refinancing, or some restructuring of our debt obligations or other improvement in liquidity, we may seek bankruptcy protection to continue our efforts to restructure our business and capital structure and may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements,” the company says in an SEC filing. PJT Partners LP serves as Energy XXI's financial adviser. 

Vaalco Energy, based in Houston, Texas, has also been affected by commodity prices, which have damaged the company’s balance sheet and cash reserves, and is considering several options, including entering into a merger agreement. Stronger players in the oil and gas sector will likely take out troubled companies to eliminate excess capacity and stop the downward spiral of prices, says Erik Rudolph of Farlie Turner & Co. in this video shotat Mergers & Acquisitions’ MM360. In the near-term, however, expectations for energy M&A reached the lowest level ever recorded for any sector measured by Mergers & Acquisitions’ Mid-Market Pulse (MMP), based on responses from dealmakers who participated in the January poll.

“We currently require additional capital to execute our business plan and continue as a going concern. If we are unable to obtain capital funding, our business operations will be harmed, and we may not be able to continue as a going concern,” Vaalco says in a March 15 SEC filing. In January, Vaalco hired financial adviser Scotia Capital to counsel the company on potential strategic alternatives and is currently considering a potential sale or merger, additional debt or equity financing, asset sales, operating cost reductions and a delay in capital spending. 

Peabody, the world’s largest coal producer, says it is exploring alternatives for other sources of capital for its ongoing liquidity needs and to improve its capital position in the current low commodity-price environment. St. Louis, Missouri-based Peabody may pursue sales of non-strategic land and coal reserves and existing mines. “We have engaged financial and other advisers to assist us in those efforts,” Peabody notes in a March 16 filing. “If we are not able to timely, successfully or efficiently implement the strategies that we are pursuing to improve our operating performance and financial position, obtain alternative sources of capital or otherwise meet our liquidity needs, we may need to voluntarily seek protection under Chapter 11 of the U.S. Bankruptcy Code.”

Peabody has already trimmed its employee headcount, a move the company says was made in response to market conditions. On March 31, the company reduced approximately 235 hourly and salaried employees from its North Antelope Rochelle Mine in the Powder River Basin, a region located in southeast Montana and northeast Wyoming known for its coal deposits. “While our asset position and contracting strategies give us relative strength, we are taking these actions to match production with customer demand," Peabody says, noting the coal sector has been challenged by an oversupply of natural gas and mild winter weather.

Meanwhile, one tool used by struggling entities as a tactic to buy more time—debt exchanges—may be a less “viable tool” going forward. A company may typically turn to this option for the benefit of lowering the overall amount of debt owed, extending the maturity the debt owed or to change the terms of their debt agreements. In recent months Peabody and SandRidge have both explored swapping out existing debt in exchange for new debt as a way of improving liquidity.

In Peabody’s case, the company sought to replace its 6 percent senior notes due 2018 for new secured debt and common stock. SandRidge offered to buy back $100 million of its senior unsecured notes for $30 million in cash and to exchange an additional $300 million of senior unsecured bonds into convertible debt.

Fitch, however, says that energy companies may have less of a leg to stand on when it comes to swapping in new debt for older obligations, especially considering that the new debt has often traded at distressed levels—below 90 cents on the dollar—in the secondary market. Fitch says that currently $71 billion in non-defaulted bonds sold by energy companies are trading below 50 cents.

“We’ve reached a point in the current lower-for-longer environment where small-scope distressed debt exchanges might not be sufficient anymore to buy time for the weaker energy companies,” says Eric Rosenthal, senior director at Fitch.

While Peabody did not comment specifically on plans to exchange any of its existing debt, the company says it “has dual objectives of preserving liquidity and reducing debt.” Peabody had approximately $900 million of available liquidity as of March 11. “Actions related to these objectives have included extensive discussions with debt holders, and the company expects to have further discussions with lenders,” the company says.

Editor's note: Energy XXI, Foresight, Linn, SandRidge and Vaalco, and their named advisers were contacted for this story and either declined to comment or did not respond to requests for comment.

For the previous edition of Turnaround Talk, see, “Sears' New Loan Receives Mixed Reviews”. For more struggling companies, check out Mergers & Acquisitions' Distressed Company Watch List.