EP Energy Corporation – Independent, Texas-Based E&P Files for Chapter 11, Key Stakeholders Back Plan to Cut $3.3bn of Debt in Debt-for-Equity Exchange

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October 3, 2019 − Publicly-traded, EP Energy Corporation and seven affiliated Debtors (NYSE: EPE, “EP Energy” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-35654. The Debtors, a Houston-based independent energy company focused on the acquisition, production, exploration, and development of onshore oil and gas assets in the United States, are represented by Alfredo R. Pérez of Weil, Gotshal & Manges LLP. Further board-authorized engagements include (i) Evercore Group L.L.C. as investment banker, (ii) FTI Consulting, Inc. ("FTI") as financial advisor and (iii) Prime Clerk as claims agent. 

The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets of $4.19bn, and estimated liabilities of $4.98bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as: Wilmington Savings Fund Society as Trustee of the 6.375% Senior Notes due 2023 ($324.0mn notes claim), (ii) Wilmington Savings Fund Society as Trustee of the 7.750% Senior Notes due 2022 ($182.0mn notes claim) and (iii) Wilmington Trust, National Association as Trustee of the 9.375% Senior Notes due 2022 ($182.0mn notes claim). All 30 of the claims listed on the Debtors’ list of top 30 unsecured claims are in excess of $1.0mn and notably includes Halliburton Energy Services, Inc. with a $35.2mn claim. As noted below, holders of general unsecured claims are expected to get a 1% recovery.

In a press release announcing the filing, the Debtors advised that “EP Energy intends to use this process to reduce its debt significantly, strengthen its balance sheet and better position the Company for the long-term. EP Energy remains focused on capital efficiency, operational execution and operating its business in the normal course during the court-supervised process. The Company has received the consent of its lenders to use cash on hand and cash flow generated by the Company's ongoing operations to support the business as it enters the court-supervised process."

The Debtors' President and CEO, Russell Parker, added. "Like other companies in our industry, we continue to experience challenging dynamics as a result of depressed commodity prices, and we have been very transparent about our ongoing efforts to actively manage our capital to control spending and preserve liquidity. The EP Energy Board and management team are confident in the strength of our assets and future of our business, and we would like to thank all our employees for their continued dedication. Our entire team is focused on running the company and we are committed to working with our vendors, royalty owners, lessors and business partners just as we always have."

Plan Overview

The Rush Declaration (defined below) provides the following summary: "A number of the Debtors’ creditors have demonstrated their belief in the Debtors’ businesses and future by agreeing to continue to fund the Debtors through these chapter 11 cases and beyond, including to put substantial new equity funding into the reorganized Company. Specifically, the Debtors’ restructuring will be funded through up to a $475 million equity rights offering (the “Rights Offering”), of which the Initial Supporting Noteholders have agreed in principle to backstop $463 million.The Restructuring Term Sheet contemplates a $629 million exit facility (the “Exit Facility”) consisting of two tranches: (i) a first-out revolving reserve-based loan facility, and (ii) a rollover second-out tranche….The Rights Offering and Exit Facility will be the backbone of the Debtors’ restructuring, as they will fund distributions to creditors, pay the costs to exit chapter 11, and provide sufficient cash to fund the Reorganized Debtors’ go-forward operations following emergence. 

The Plan will also provide for distributions to junior stakeholders. Absent the agreements of the Company’s senior creditors set forth in the Restructuring Term Sheet, junior stakeholders would likely not be entitled to any recovery. Under the Restructuring Term Sheet, unsecured creditors will receive 1.0% of the new common stock in reorganized EP Energy (“New Common Shares”)…In addition, in consideration of the tax attributes of EP Energy that will be made available to the reorganized Company going forward, existing holders of EP Energy’s Class A common stock will receive a cash distribution.

In addition to the Rights Offering and Exit Facility, the Plan will provide for, among other things:

  • 1.125L Notes Claims will be reinstated on current term terms or such other terms as agreed to by the Company, Apollo, and Elliott. 
  • 1.25L Notes Claims will be, post-equitization, reinstated on current terms or such other term as agreed to by the Company, Apollo, and Elliott.
  • Holders of 1.5L Notes Claims will receive their pro rata share of 99.0% of the New Common Shares, subject to dilution by the Rights Offering Shares, the Backstop Commitment Premium, and the EIP Shares.
  • Holders of Unsecured Claims will receive their pro rata share of 1.0% of the New Common Shares, subject to dilution by the Rights Offering Shares, the Backstop Commitment Premium, and the EIP Shares.
  • Holders of Existing Class A Common Stock will receive, on account of available assets of EP Energy, their pro rata share of $500,000.

Restructuring Support Agreement

In documents filed with the Court (see Exhibit B of Docket No. 16 for the Restructuring Term Sheet) the Debtors state: "After extensive negotiations with its stakeholders, [EP Energy] has reached an agreement in principle with noteholders holding approximately 27.6% of the Debtors’ 1.25L Notes and noteholders holding approximately 71.2% of the Debtors’ 1.5L Notes…including affiliates of, or funds managed by Elliott Management Corporation ('Elliott'), Apollo Global Management, LLC ('Apollo'), and certain other holders (collectively, the 'Initial Supporting Noteholders') with respect to a plan of reorganization to be filed with the Court in the early stages of these Chapter 11 Cases (the 'Plan').

Subject to finalizing definitive documents with the Initial Supporting Noteholders, the Plan will provide for a substantial reduction of the Company’s existing funded debt by approximately $3.3 billion and reduce the Company’s annual debt service obligations by up to $263 million. The vast majority of the Company’s operational creditors, such as trade vendors (most of which benefit from statutory liens and/or setoff rights under state law) and employees, are expected to be unimpaired and satisfied in full in the ordinary course of business. Operations and drilling will continue in the ordinary course in accordance with the Company’s business plan."

Pre-Petition Indebtedness

The Debtors have funded debt obligations in the aggregate amount of approximately $4.909bn, which amount consists of 

  1. approximately $629 million in reserve-based revolving loans (the RBL Facility), 
  2. $1 billion in senior secured 1.125L Notes, 
  3. $500 million in senior secured 1.25L Notes, 
  4. approximately $2.092 billion in senior secured 1.5L Notes, and 
  5. approximately $688 million in senior Unsecured Notes. 

RBL Facility. Certain of the Debtors are parties to the “RBL Credit Agreement” that provides for a commitment of approximately $629.0mn, including a sublimit for a letter of credit facility (the “RBL Facility”). As of the Petition date, the RBL Facility was fully drawn, including approximately $27.0mn in letters of credit that remain outstanding but are undrawn as of the Petition Date, plus any applicable interest, fees, and other amounts outstanding under the RBL Credit Agreement. 

Prepetition Notes. In addition to the RBL Facility, as of the Petition Date, the Company had issued notes in the aggregate principal amount of $4.279 billion:

  1. $1.0bn of 7.750% Senior Secured Notes currently maturing on May 15, 2026 (the “1.125L Notes”, the holders of which are referred to as the “1.125L Noteholders”);
  2. $500.0mn of 8.00% Senior Secured Notes currently maturing on November 29, 2024 (the “1.25L Notes”, the holders of which are referred to as the “1.25L Noteholders”);
  3. Approximately $1.092bn of 9.375% Senior Secured Notes currently maturing on May 1, 2024 (the “2024 1.5L Notes”, the holders of which are referred to as the “2024 1.5L Noteholders”);
  4. $1.0bn of 8.00% Senior Secured Notes currently maturing on February 15, 2025 (the “2025 1.5L Notes” and, together with the 2024 1.5L Notes, the “1.5L Notes”, the holders of which are referred to as the “2025 1.5L Noteholders” and, together with the 2024 1.5L Noteholders, the “1.5L Noteholders”); 
  5. $182.0mn of 9.375% Senior Unsecured Notes currently maturing on May 1, 2020 (the “2020 Unsecured Notes”); 
  6. $182.0mn of 7.750% Senior Unsecured Notes currently maturing on September 1, 2022 (the “2022 Unsecured Notes”); and
  7. $324.0mn of 6.375% Senior Unsecured Notes currently maturing on June 15, 2023 (the “2023 Unsecured Notes”, and collectively with the 2020 Unsecured Notes and 2022 Unsecured Notes, the “Unsecured Notes”, the holders of which are referred to as the “Unsecured Noteholders”).

The Pre-Petition and Expected Post-Petition Capital Structure

Prepetition Capital Structure

Post-Restructuring Capital Structure

Prepetition Reserve Based Revolving Loans: $629 million in revolving loans

Exit Credit Facility: $629 million exit credit facility

Prepetition 1.125L Notes: $1 billion in senior secured notes

1.125L Notes: $1 billion in senior secured notes

Prepetition 1.25L Notes: $500 million in senior secured notes

1.25L Notes: $350-362 million in senior secured notes

Prepetition 1.5L Notes: $2.092 billion in senior secured notes

Equity in Reorganized EP Parent

Prepetition Unsecured Notes: $688 million in senior unsecured notes

Equity in Reorganized EP Parent

Total Current Funded Debt = $4.909 billion

Total Reorganized Funded Debt = $1.553–1.565 billion


Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Rush Declaration”) [Docket No. 16], David Rush, the Debtors' Chief Restructuring Officer (on loan from FTI) detailed the events leading to EP’s Chapter 11 filing. It is a now familiar story of lower commodity prices, declining revenues and an inability to service debt; in this case the Debtors facing an annual interest expense bill of $365.0mn ($1.0mn a day) in respect of their almost $5.0bn of debt. 

The Rush Declaration states: "As has been well documented, the distressed market conditions in the oil and gas industry, which began in 2014, have negatively impacted all levels of the industry, including upstream companies that produce oil and gas. As evidenced by the numerous chapter 11 filings or other announcements of debt restructurings in the industry, the impact of the volatility of the commodity markets on the Company’s businesses is clear. Notably, oil and natural gas prices dropped precipitously in 2014 and 2015 and have held at depressed levels for the last several years. Both the decline and the length of this trough have been greater than what anyone in the business could have reasonably anticipated, resulting in a substantial decline in revenue, reserves, and asset values across the industry

When the Company was formed, during the first quarter of 2012, West Texas Intermediate (“WTI”) spot price averaged approximately $103 per barrel (“Bbl”), and in 2014, WTI spot price still averaged approximately $93 Bbl. In contrast, in 2015, the WTI spot price averaged approximately $48 per Bbl, and in 2016, the WTI spot price dropped at one point to below $27 per Bbl. In 2017, the WTI spot price stabilized at around $50 Bbl, and returned as high as $76 Bbl in 2018, but in 2019 has dropped precipitously again to an average of $57 Bbl (as of September 16, 2019). Similarly, the price of natural gas has dropped from an average of $4.37 in 2014 to an average of $2.62 YTD in 2019 (as of September 16, 2019).

The Company, of course, has not been immune to these adverse market conditions and the impact on its reserves, cash flow, and ability to service its outstanding indebtedness. As with many of its peers, this drastic and prolonged drop in prices and the severe dislocations it caused to the Company’s operations have impacted the Company’s asset base and put the Company in a stressed liquidity situation. For example, in 2015, the company recorded a $4.3 billion impairment charge to the carrying value of its Eagle Ford assets, largely as a result of the significant drop in estimated future cash-flows from the company’s reserves due to lower commodity prices. More recently, the Company’s natural gas revenues decreased by approximately $35 million year-over-year (32%) in 2018 due primarily to lower natural gas prices. Similarly, largely on account of the drop in oil prices, oil revenues decreased by approximately $136 million year-over-year (25.5%) for the six-month period ending June 30, 2019. In fact, as a 29 result of the decline in commodity prices since the third quarter of 2018 and the attendant reduction in future development capital allocated to the Permian basin, the Company incurred non-cash impairment charges of approximately $1.103 billion in the Permian basis in the fourth quarter of 2018.”

Significant Shareholders

  • Affiliates of Apollo Global Management LLC: 39.0% 
  • Korea National Oil Corporation: 12.3% 
  • Affiliates of Riverstone Holdings LLC: 12.3% 
  • Access Industries, Inc.: 13.7%

About the Debtors

EP operates as an independent exploration and production company engaged in the acquisition and development of unconventional onshore oil and natural gas properties in the United States. In 2018, EP had operating revenues of approximately $1.324 billion. The Company’s revenues are generated primarily through the physical sale of oil, natural gas, and natural gas liquids to third-party customers at spot or market prices under both short and long-term contracts, as well as settlements of the Company’s in-the-money commodity hedge positions. The Debtors operate through a diverse base of producing assets and is focused on the development of drilling inventory located in three areas: the Eagle Ford Shale in South Texas, the Permian basin in West Texas, and Northeastern Utah.

The Debtors describe themselves as follows: "At EP Energy, we’re driven to deliver superior returns for our investors by developing the oil and natural gas that feeds America’s growing energy needs. Our high-quality asset portfolio includes programs in the Eagle Ford, Permian, and Northeastern Utah areas. We have a diverse asset base with significant reserves and large positions in our core development programs.

  • In the Eagle Ford in south Texas, we operate a low-cost, capital-efficient program with favorable market pricing.                  
  • In the Permian of west Texas, our program includes a significant reserve base and multi-decade drilling inventory.              
  • In the Northeastern Utah, our program is focused on delivering strong performance from a rich resource base.

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