Energy XXI's (EXXI) bankruptcy proceedings resulted in renewed hope for equity shareholders today, as Judge Marvin Isgur ordered the trustee to appoint an equity security holders committee. Back in mid-April, EXXI voluntarily filed for Chapter 11 bankruptcy in order to restructure their balance sheet. The company is one of many energy companies whose value has been destroyed by the large and sustained fall in oil and gas prices.
Equity holders were looking at a total loss of their investment, but a determined group of 16 shareholders refused to go down without a fight, instead hiring attorney Ed Rothberg to file a motion to request that an equity committee be appointed.
"The Court reaffirmed shareholders faith in the system in appointing an equity committee while balancing the cost issues to the estate, " said Deirdre Brown, Counsel to Ad Hoc Equity Committee. "It remains to be seen whether the Equity Committee will recover any value for shareholders, but now they at least have a position at the table."
Brown explained further that in granting the motion, the Court noted that the concerns raised by the shareholders appeared to raise two issues of first impression in the context of appointing an equity committee - was the Debtors' proposal to provide management with equity unfair discrimination to other equity holders, and the issue of third party releases. The Court also recognized that the investor presentations provided late 2015 could not be reconciled with the Debtors' more recent expert valuation testimony, yet the two were only months apart.
Management took EXXI into chapter 11 with a restructuring support agreement (RSA) in place involving the agreement of 63% of the 2nd Lien Secured Debtholders. The plan is for them to convert their $1.45B in debt into the new equity. The $1.3B in 3rd Lien debt was to be eliminated, with out-of-the-money warrants issued totaling 10% of the new equity. While all current equity stakes were to be eliminated completely, management negotiated with the 2nd Lien holders to remain in charge and receive up to 8% of the new equity in EXXI. On top of that, there was language in the RSA granting releases for management from most any future 3rd party claims against them related to the bankruptcy.
Shareholder groups involved in other bankruptcy proceedings can be expected to be quite interested in Judge Isgur's decision. In particular, a large group of SunEdison (OTCPK:SUNEQ) equity holders are currently fighting for the creation of an equity committee in its bankruptcy case. These shareholders also feel that management presentations just months before the company declared bankruptcy painted a much different picture from the one being used today to argue why there will be no residual value left for the equity.
Even with the good news today, EXXI equity holders are still in a challenging position, given that the company's current net equity position is close to $(2.5B). Earlier this year, when oil was under $30/barrel, the situation seemed hopeless. However, with oil currently around $50 and potentially on its way to higher levels, a much stronger argument can be made that the equity deserves a small piece of the new pie. This is particularly true given that management paid themselves over $16M last year, and stand to be given 8% of the equity in the new company, which could be worth well over $50M if the company's recent projections of $92M net cash flow in FY17 are accurate.
Given that EXXI's stock is currently trading at around $.05/share and was expected to be wiped out, even a small piece of the new equity would be a win for shareholders. Many will point to the deal Halcon Resources (NYSE:HK) offered in their restructuring proposal as an example of a fair offer to existing equity. Their shareholders are being offered 4% of the new equity, equal to about $25-30M of the projected new valuation.
It's not yet clear what a stake for EXXI shareholders could be worth, but we will find out over the next few months.
Disclosure: I am/we are long EXIXF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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