Rumor that Banks are going to take over E&Ps - Apr 20

[dan_s]

Bank Owned E&Ps? Likely Not. New Private Equity Deal Structures? Probably
By John White at Roth Capital 4-20-2020

Over the last two weeks, major news agencies have reported large U.S. lenders are preparing to become operators of oil and gas fields across the country to avoid losses on loans to energy companies that may go bankrupt. Large banks were reported to be in the process of setting up independent companies to own oil and gas assets. Last week we had lengthy discussions about this subject with a number of active oil and gas bankers and, based on what we learned, we don’t think these reports of banks owning E&P assets will materialize in any substantial numbers, and in fact, may not materialize at all.

The lenders we spoke with said the main problems with these reports and these plans unfolding hinge on 1) the nature of these syndicated loans, 2) the voting requirements governing the actions by the bank syndicate and 3) banks’ motivations and desired outcomes of the problem loans. Regarding the nature of these bank syndicates, in any given loan/credit, the agent and lead bank likely has a maximum 20% interest and is far from being in control. The remainder of the credit is held by a group of likely 15 to 20 other lenders, which include a number of regional banks and U.S. subsidiaries of foreign banks. To move any assets foreclosed on by the bank group would require a 100% vote of approval from the members of the syndicate. We were told a 100% vote of approval is extremely unlikely for a number of reasons. First, it has been widespread industry knowledge for over a year that many of the regional banks in these syndicated credits want out of the business of lending to E&P companies, so they are very unlikely to vote for approval of an action like this. Would the U.S. subsidiaries of foreign banks support such an action? Likely not we were told. Then there is the issue of working capital and development drilling capital that a bank owned E&P company is likely to incur. Depending on operating costs, this could require the banks lending more money to a borrower operating in Chapter 7, which is hardly an undertaking we would see the banks relishing, to say the least.

During our discussions last week we did learn of a new deal structure that we were told is being actively discussed and being discussed much more so than bank owned E&P asset structures. This potential new structure would involve a highly leveraged E&P company filing under Chapter 11, with the bank debt being exchanged for equity in the new company that emerges from the Chapter 11 reorganization. The bank group would also provide the new company with a new, conforming borrowing base governed credit facility. For the development drilling capital requirements, a private equity firm would purchase newly created preferred stock in the new company. Also, the private equity firm would gain management control of the new company and would install its own management team, and this management team would contribute a small amount of common equity in cash. The potential returns to the preferred stock would be structured under a waterfall arrangement, such that, if oil prices improve and if the development drilling is successful, the private equity firm could redeem its preferred stock through redemption by the new E&P and realize a range of returns in the mid-teens.