November 27, 2017
Interviewed by: Privcap
Video Clip
Login to view full video

It’s ‘Haircut’ Time in Oil & Gas Deals

An energy deals pro describes a landscape where distressed energy companies are agreeing to out-of-court restructurings. He says we are in a ‘golden age’ for private equity energy deals.

An energy deals pro describes a landscape where distressed energy companies are agreeing to out-of-court restructurings. He says we are in a ‘golden age’ for private equity energy deals.

It’s “Haircut” Time in Oil & Gas Deals

With Sean Wheeler of Latham & Watkins

Sean Wheeler, Latham & Watkins:

There a lot of oil and gas companies that have kind of made it through the cycle. They managed to adjust their cost structure and have been able to make a profit in this environment. Unfortunately, there a lot of oil and gas companies that are not able to do that. They’re overlevered. They’re struggling and so this is where private equity and other companies are able to really come in and help with the restructuring of those companies.

I think the wave of bankruptcies in oil and gas business has reached its crest. I don’t think we’re going to see a lot more bankruptcies. I do think we’re going to see a lot more restructuring and out of court restructurings.

Privcap: What is the appeal of out-of-court restructurings?

Wheeler: In court restructurings, bankruptcies can be very costly and timeconsuming. Outofcourt restructuring—particularly for companies that have a relatively simple capital structure, they may be under water on the first lien and the second lien, but they don’t have a lot of other complex debt or bond holders. So, an outofcourt restructuring enables those companies to move more quickly to rightsizing their capital structure.

Describe a typical distressed investment opportunity that you see in today’s energy market.

Wheeler: We’re seeing a lot of companies in the oil and gas space that are simply overlevered. A lot of these have first liens or second lien debt. The value of their assets is not sufficient to pay off all of those creditors. The income off those is also not sufficient to enable them to continue operating on a goingforward basis in a healthy way. They’re reaching out to a lot of different parties. A lot of times, there are times they’re negotiating directly with their banks. The bank groups typically do not want to take these assets on their balance sheets. They would much rather work out a process to where they can either haircut the debt or they can sell the assets to a third party and recover whatever they can.

What kind of an opportunity does this present for private equity players in the space?

Wheeler: I really think this is the golden age for private equity in the oil and gas space. It’s really what they do best. Private equity, that is. They come in, they find distressed assets, they’re able to rightsize the capital structure, they’re able to work with the management teams and they can buy at the bottom and sell at the top.

A lot of these companies that are in distress are actually portfolio companies of other private equity firms. A private equity firm, or other buyer who comes in to acquire the assets, needs to be careful about claims by for former limited partners of the private equity fund that’s struggling. They need to be careful about royalty claims of the oil and gas company that’s going through the restructuring. [They] need to be careful about environmental and other types of claims as well. We need to get as broad a release as possible. We need to see if we can find a way to get some indemnities. Indemnities are difficult in a restructuring context because, by definition, the companies don’t typically have a lot of resources.

Register now to watch this video and access all content.

It's FREE!

  • CHOOSE YOUR NEWSLETTERS:
  • I agree to the Privcap terms of use and privacy policy
  • Already a subscriber? Sign In

  • This field is for validation purposes and should be left unchanged.