On The Carlyle Group's quarterly conference call in late April, chief executive David Rubenstein said the belief that oil prices would rebound quickly was based on hope rather than sound analysis.
The weeks that have followed are unlikely to have changed his mind and many in the energy sector face a future of low prices combined with high debt loads. Not even industry giants have been immune, with Exxon recently losing its AAA S&P rating it had maintained since 1930.
As many analysts predict that energy prices will remain “lower for longer”, the market is seeing a wave of bankruptcy and debt restructurings, with Oil & Gas Investor, the trade publication, reporting that more than 60 oil and gas companies have filed for bankruptcy protection since the beginning of 2015.
One restructuring that stands out is that of Pacific Exploration and Production, a Canadian-owned oil and gas company operating mostly in Colombia.
As the firm moves ahead with one restructuring offer while other investors offer a competing proposal, Pacific's shareholders face the likelihood of retaining less than $1 billion in equity from the more than $5 billion in debt the company amassed. Rival bids, multiple jurisdictions and competing accusations of arrogance, corruption and collusion have all helped cloud the future of an oil and gas company once thought to be among the most promising in South America.
The restructuring underlines the complexity of resource companies with operations spread across different countries and serves as an illustration that competing proposals can be evaluated by stakeholders in idiosyncratic ways.
Pacific Exploration and Production is Latin America's largest privately owned oil producer, with more than 70 exploration and production blocks, primarily in Colombia, as well as additional operations in Brazil, Peru, Guatemala, Guyana and Belize.
In May 2015, Mexican conglomerate Alfa SAB and Harbour Energy, an energy investment vehicle formed by EIG Global Energy Partners, proposed to buy Pacific for $6.50 per share.
EIG is an established player in energy financing. Founded in 1982, it counts pension plans, insurance companies, endowments and sovereign wealth funds among its clients and has about $14 billion in assets under management. In its 34 years it has participated in more than 300 investments across 35 countries.
Pacific's board voted to pursue the Alfa/Harbour proposal but was blocked by the O'Hara Administration, a group of Venezuelan investors constituting Pacific's largest shareholder. As oil prices fell in the months that followed, Pacific began to miss payments and, realising that its debt was no longer sustainable, the company began to look for a new partner to help restructure its finances.
According to Pacific's first-quarter 2016 earnings report, the company had senior secured notes trading on the official list of the Luxembourg Stock Exchange totalling $4.1 billion as of the end of last year, with maturities ranging from 2019 to 2025 and interest rates ranging from 5.125 percent to 7.25 percent. The company also reported a $1 billion revolving credit facility and a syndicate of lenders including Bank of America, HSBC Bank and Banco Latino Americano de Comercio Exterior.
Six bids were put forward to save the company, all of which were evaluated by an independent committee made up of Pacific's note holders and some of the company's bank lenders, in accordance with Canada's Companies' Creditors Arrangement Act (CCAA).
The firm announced on 19 April that it had reached an agreement to restructure its debt with the Catalyst Capital Group, Canada's second-largest private equity investment manager. The Toronto-based firm was founded in 2002, specialises in control and influence investments and has deployed 90 percent of its capital into senior secured debt.
The Catalyst plan would inject $500 million in debtor-in-possession (DIP) financing into the company while reducing its total debt by $5 billion. Catalyst would provide $250 million of DIP financing while the remaining $250 million would be provided by unnamed partners in exchange for five-year secured notes upon exit of the restructuring transaction.
Catalyst would ultimately own 29.3 percent of the fully diluted common shares in a reorganised Pacific, with the unnamed partners receiving 12.5 percent.
“We are pleased to have reached the terms of a restructuring transaction that will significantly strengthen the company and ensure the long-term viability of the business, all without impacting our ability to serve our customers, suppliers and other stakeholders,” said Pacific chief executive officer Ronald Pantin announcing the deal with Catalyst.
However, if he hoped that would be an end to the matter he was to be disappointed.
In a letter to Pacific's board reported by Bloomberg on 20 April, EIG chief executive R Blair Thomas claimed that his firm's own restructuring offer was “highly superior” to Catalyst's and expressed EIG's willingness to keep engaging with Pacific about restructuring its debt.
It also reportedly included EIG's position that the company should avoid “value-destructive asset sales” and its belief that the Catalyst bid had been pursued in co-ordination with Pacific co-chairmen Serafino Iacono and Miguel de la Campa, who stood to benefit from the deal.
After Catalyst's proposal had been endorsed by 75 percent of debt holders (surpassing the requirement for CCAA protection) Pacific filed for bankruptcy in Canada on 27 April, followed by Chapter 15 protection with the US Bankruptcy Court in the Southern District of New York on 2 May.
The company also took steps to pay its business partners in Colombia in order to convince them that Pacific would be able to stand by its obligations as it moved through restructuring.
The move has not come without opposition. O'Hara petitioned the Colombian courts, expressing its belief that the committee set up to evaluate the restructuring offers was not independent and the information it provided inaccurate. In addition, O'Hara is reported to be pursuing a criminal suit alleging fraud in the case.
On 9 May, EIG announced it had submitted a new proposal to provide $500 million in DIP financing to Pacific and sponsor a restructuring of the company to its board on 7 May.
EIG said the offer would include an additional $75 million to bolster Pacific's balance sheet, $50 million of which could be used as operational capital and $25 million to meet the break fee in connection with the Catalyst proposal.
EIG proposed the creation of a $400 million cash-out offer for existing shareholders. Additionally, EIG proposed a fund for Pacific's Colombian stakeholders.
In the statement presenting its offer, which was set to expire on 31 May, EIG provided a table in which it compared their offer to the one it categorised as the “Catalyst/Co-Chairman's Offer”. The table states that while unnamed funding creditor ownership under both offers would be the same at 12.5 percent, EIG would own just 25 percent of the reorganised company and Catalyst 29.3 percent. Furthermore, the EIG offer would leave the company with a $1.2 billion implied equity value, compared with just $853 million under Catalyst's offer.
“EIG's binding proposal is undeniably superior and is clearly in the best interest of creditors, the company and its other stakeholders,” said Thomas. “Our proposal provides the best path forward for all the stakeholders, including creditors, shareholders, employees, commercial counterparties and the communities and countries in which the company operates. The numbers speak for themselves.”
Pacific representatives say that the EIG offer is being reviewed, but they are moving ahead with the Catalyst bid and expect the CCAA proceedings to be completed later this year.
Definitive judgment on what is driving Pacific's various stakeholders is clouded by rumours of collusion and competing visions for the company's long-term direction.
But as energy firms increasingly struggle to meet their debt obligations, many will face a dilemma similar to that confronting Pacific: do you partner with a firm that offers a greater degree of control (as Pacific would see with Catalyst) or do you surrender control in exchange for the deep industry expertise that comes along with working with an established industry player like EIG?
Regardless of future oil prices, lessons that can be drawn from the tale of Pacific's debt will be of value in the months to come as investors begin to search the blighted landscape of indebted energy companies for long-term opportunities.