The recent OPEC/COVID-19-related drop in energy prices may soon set off a tidal wave of energy-related bankruptcies. Funding for exploration and production (“E&P”) companies is much harder to find, and much more expensive, than it was just a few weeks ago. Reserve reports that might have been at “concern” status at year end will be at “Big Red Flag” status at the close of this quarter, absent a dramatic uptick in prices. Low prices and high volatility are having a major impact on the cost of capital—and even access to capital—for energy companies across the board, but especially for E&P companies and private equity companies looking to acquire E&P-focused assets.
The Alta Mesa bankruptcy case pending in Houston provides a good example of how quickly and thoroughly the credit markets have tightened for E&P companies in a matter of weeks. Alta Mesa is an E&P company focused on oil and gas reserves in the eastern portion of the Anadarko Basin referred to as the STACK. For a host of reasons, Alta Mesa filed a Chapter 11 bankruptcy in Houston to sell its assets and to use the proceeds to pay creditors.
On December 30, 2019 (when WTI closed at $61.68), a special purpose entity led by a former member of Alta Mesa’s board (“Buyer”) signed an agreement to purchase essentially all of Alta Mesa’s E&P assets for $225,000,000.00. The purchase agreement did not have a financing contingency. Some creditors complained that the sale price was too low and sought to squeeze additional money from Buyer or to extend the bidding deadline. After an extensive hearing, on January 24, 2020 (WTI: $54.19), Bankruptcy Judge Marvin Isgur approved the sale of Alta Mesa’s E&P assets to Buyer at a price of $232,000,000.00. The purchase agreement required the sale to close by February 12, 2020 (WTI: $51.17). Buyer asked to postpone the closing to the end of February for administrative reasons, but failed to close by month end. On March 2, 2020 (WTI: $46.75), Buyer advised Alta Mesa that its new target closing date would be March 9, 2020 because it needed time to negotiate definitive agreements under a loan commitment. By March 9, 2020 (WTI: $31.13), however, oil prices had fallen roughly 50% from the day the purchase agreement was signed, and Buyer disclosed that it was no longer able to obtain the financing it anticipated using for the purchase. At March 9 values, Alta Mesa’s to-be-acquired assets were worth less than the loan needed to purchase them just a few weeks earlier.
We are expecting to see an increase in energy-related loan defaults and bankruptcy filings in 2020 due to the recent price drops and high volatility. This will create good buying opportunities for those with access to capital, a strategic plan, and a longer-term view on assets in Texas, Louisiana, and the Gulf of Mexico in particular.