Gordian Perspectives for December 2019

Each month members of Gordian Group team pick three articles, posts or current news events that we found interesting and worth sharing with Gordian clients and our growing network . We provide some commentary and context and where applicable how Gordian Group can help.

More Mergers and Bankruptcies in the Oil Industry

CNBC recently reported on the link between failing shale “frackers”, industry consolidation and the potential for rising oil prices. I think the author’s conclusions are bang-on, and have dramatic implications for distressed shale producers – and their equity constituencies.

My own logic of getting to these conclusions is a bit different from the author’s, and goes as follows:

  • Shale fracking has been a transformative technology, and has been instrumental in keeping oil prices lower than they would otherwise be. If shale oil is now the “marginal” barrel on the world oil market, then shale’s marginal all-in cost of production would determine the clearing oil price
  • Up until maybe a year ago, the frackers were on a roll. Then some bad news began to hit. The once-hot STACK play in the Anadarko Basin proved to be a disaster. One of the larger STACK participants, Alta Mesa, is in bankruptcy, with its bonds trading at 10 cents on the dollar
  •  As Alta Mesa’s fortunes declined, its bond prices also sank. Interestingly, the bond decline generally mirrors the YTD oil price trend (I know, there are “lies, damn lies and statistics”).
  • People who make investment decisions in this area tell me that many once-“attractive” shale plays will be unattractive for new drilling until oil prices exceed $70 per barrel. One of the key underlying reasons is that there may be a lot less recoverable oil than the frackers originally anticipated.

Everything else being equal, I think there is a reasonable argument that oil prices may be higher down the road than they are today. Of course, not everything else is equal, and there will be other forces at play that move oil prices.

Nevertheless, I do believe in a higher long-term price scenario. If true, this has major implications for all distressed oil & gas companies. Playing for time almost always helps a debtor in creditor negotiations. If there is a meaningful prospect that oil prices will be higher in a year or two, the play-for-time advantage is magnified.

Commentary by Gordian Group CEO Henry Owsley


Tough Times in the Oil Sector

The energy business hasn’t caught many breaks lately. If it isn’t ho-hum oil prices (drillers are not too excited over $50 to $60 per barrel oil), increasingly risky shale plays, the Green New Deal, or Elizabeth Warren’s stated desire to ban fracking totally, it is the mountain of debt US E&P companies have taken on.

We read a recent Wall Street Journal piece that focused on this latter point. The WSJ reports that there are $120 billion of debt maturities looming over the energy production and services sector in the next 5 years alone. In our view (even at current oil price levels), a lot of this debt will not be repaid or refinanced – much of it will be restructured at meaningful discounts. Our view is heavily influenced by the challenges industry players already face in raising money in this environment. For a variety of reasons, we see these difficulties becoming even greater as the current economic cycle unfolds.

In this environment, many energy firms that allow events to overtake them will end up in chapter 11, selling assets merely to repay secured and other creditors. Stockholders would get wiped out.

But it doesn’t have to be this way. Well-advised and aggressive Boards and Private Equity owners can start taking steps that will allow the enterprise to survive – and result in a positive outcome for shareholders. Further, opportunistic acquirors may find this to be their greatest opportunity in many years. You may want to read and subscribe to our Distressed Debt and Private Equity blog series for insights and ideas.

Commentary by Gordian Group CEO Henry Owsley


Winter is Coming

For the two or three readers out there that have not seen Game of Thrones, “Winter is coming” refers to the unpredictable and extreme change of seasons in the HBO series’ fictional universe. It is equally applicable to the upcoming recession – whenever it arrives.

Given our decades of experience in representing buyers and sellers of distressed businesses, Gordian Group knows this environment well. We have fielded a lot of inquiries recently from Private Equity firms and other potential distressed buyers that are seeking an edge in acquiring assets at bargain basement prices.

To be sure, there are strategies that can be effective in achieving these purchase objectives. We have written about them extensively in Distressed Investment Banking: To the Abyss and Back and Equity Holders Under Siege: Strategies and Tactics for Distressed Businesses.

However, some potential buyers are expecting this will be an easy road to riches, and the popular media is fueling these overly-simplistic hopes by dispensing all-too-facile advice. An example of this faulty logic is set forth in the following article, from CFO Magazine based on input from BDO, an accounting firm. It suggests that if a buyer can steer the sale to a bankruptcy auction process (referred to as a “363 sale”) and if the buyer obtains “stalking horse” status as the lead bidder, the path will be paved with riches. Good luck with that.

In the complex world of restructurings, there is a lot more to it. A buyer needs to understand the range of economic outcomes and strategies available to each of the target company’s major constituencies. This understanding can inform the potential buyer’s strategy regarding the needed level of consideration and whether alliances with various parties may be in order. The buyer also needs to determine whether it should sponsor a Plan of Reorganization (frequently a good strategy, since the buyer can end up controlling the process) vs. being a participant in a chapter 11 auction. Whether or not the potential bidder is designated as the “stalking horse” does not really change the fundamental auction dynamics – the buyer willing and able to put the most money on the table almost always wins.

A well-advised bidder should try to avoid such competitive events, if at all possible. This is the arena in which we live. We welcome inquiries from Private Equity firms and other potential buyers to discuss how we might be helpful in crafting strategies for the upcoming recession. Contact me if you’d like to discuss this further.

Commentary by Gordian Group CEO Henry Owsley