Fed-up creditors seek to put US energy's zombies into bankruptcy
23/12/2015 18:00
By Tom Hals
WILMINGTON, Del, Dec 23 (Reuters) - Rising financial stress
in the U.S. energy sector has prompted some suppliers and
vendors to take unusual legal action to collect unpaid debts:
forcing struggling companies with billions of dollars in debt
into bankruptcy.
Since August, creditors have filed petitions for involuntary
bankruptcy against three energy producers with nearly $2 billion
in combined debt: Miller Energy Resources Inc MILLQ.PK , Black
Elk Energy Offshore Operations BLCELB.UL and Energy &
Exploration Partners Inc ENXP.N .
During that period, there have been a total of seven
bankruptcies involving energy companies with at least $200
million in debt.
Involuntary bankruptcies signal deepening pessimism about
the crude market outlook and herald more distress for oil and
gas producers if prices stay low.
Petitions for involuntary bankruptcy, which seek to impose
court oversight on a company that is not paying its debts, are
very rare and typically target smaller operations. Over the past
decade, they accounted for less than 1 percent of the tens of
thousands of business bankruptcies filed each year, according to
the Administrative Office of the U.S. Courts. (Graphic:http://tmsnrt.rs/1T1XJ1e)
Involuntary bankruptcies targeting large companies are
particularly unusual. Over the past 12 years, creditors have
taken such action against only six public companies. Four of
those were filed this year. In addition to Black Elk and Miller
Energy, creditors have also filed for involuntary bankruptcies
against two public companies embroiled in litigation: a casino
operator and a property firm.
"The downside risks are extreme," said Mark Salzberg, a
bankruptcy attorney with Squire Patton Boggs in Washington. If a
judge dismisses a petition for involuntary bankruptcy, the
debtor company can seek its legal costs and punitive damages
against the creditors that filed it.
But recently creditors have been willing to take that chance
in a sign of receding hopes for an oil market rebound.
Oil prices have crashed to less than $35 a barrel CLc1 at
one point from above $100 a barrel 18 months ago, creating
energy industry "zombies" that have been forced to slash costs
and idle operations to conserve cash. urn:newsml:reuters.com:*:nL1N13K1DP
These producers have slashed thousands of jobs, and
postponed paying bills.
"Some producers are getting very, very far out there with
what they owe their suppliers," said John Sparacino, a
bankruptcy attorney with Vorys, Sater, Seymour and Pease in
Houston, who represented driller National Oilwell Varco NOV.N
in the Miller involuntary filing.
Lawyers expect more bankruptcies unless crude prices
recovers. "If oil continues below $40 a barrel, we should expect
to see even more energy filings, both voluntary and
involuntary," said John Penn, a bankruptcy lawyer with Perkins
Coie in Dallas.
LENDERS VS SUPPLIERS
Involuntary bankruptcy gives vendors some say over how an
energy producer's dwindling funds are managed, and vendors can
use it to try to stop a company from cutting deals that favor
lenders or investors.
Such cases also allow creditors to choose the court, and all
three of the recent cases have been filed outside the busy
bankruptcy court in Wilmington, Delaware. Bankruptcy lawyers in
Texas said that may suggest suppliers are worried the court is
too eager to approve quick sales of businesses, which tend to
favor secured creditors.
Baker Hughes Inc BHI.N and Schlumberger SLB.N , major oil
field service firms, initiated the cases that put Miller and
Energy & Exploration Partners into bankruptcy. The Black Elk
case was filed by smaller privately held vendors: Gulf Offshore
Logistics and The Grand Ltd of Louisiana, and Ryan Marine
Services Inc and Laredo Construction Inc of Texas.
In securities filings, Baker Hughes and Schlumberger
described more than $300 million of accounts receivables as
"doubtful," or unlikely to be paid. If an energy producer
becomes financially distressed that kind of trade credit is less
likely to be repaid than a loan, which is secured by collateral.
Baker Hughes, which has agreed to be acquired by Halliburton
Co HAL.N , declined to comment and Schlumberger did not respond
to a request for comment.
To seek an involuntary bankruptcy, a creditor must be able
to prove it is legitimately owed money and that the company
generally is not paying its debts as they come due.
Companies can seek to dismiss the involuntary filing, but
often they opt to convert the case to a voluntary bankruptcy,
which gives them more control over the proceeding.
For example, Black Elk Energy converted its case to a
voluntary bankruptcy a month after creditors filed the
involuntary petition.
A lawyer for the creditors, Matthew Okin of Okin & Adams in
Houston, said the involuntary bankruptcy prevented the Gulf of
Mexico producer from being stripped of all of its value in favor
of the company's owners, Platinum Partners. "I think it was
absolutely necessary," he said.
Platinum Partners did not respond to a request for comment.
Black Elk has appointed an independent chief restructuring
officer who is investigating the allegations against Platinum
Partners, said the company's lawyer Elizabeth Green, of
BakerHostetler.
Energy & Exploration and Miller Energy did not respond to
requests for comment.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic: Involuntary bankruptcies of U.S. companies http://tmsnrt.rs/1T1XJ1e
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Amy
Stevens and Tomasz Janowski)
((thomas.hals@thomsonreuters.com; +1 610 544 2712; Reuters
Messaging: thomas.hals.thomsonreuters.com@reuters.net))
Keywords: USA ENERGY/BANKRUPTCY