Pioneer Energy Services Corp. – Court Confirms Prepackaged Plan of Reorganization Over Credit Suisse Led Objection, Rejects Arguments that COVID-19 Provided an Out to Plan Support Agreements

May 11, 2020 – The Court hearing the Pioneer Energy Services Corp cases confirmed the Debtors' Prepackaged Chapter 11 Plan of Reorganization [Docket No. 331].

On March 1, 2020, Pioneer Energy Services Corp. and nine affiliated Debtors (until a September 2019 delisting NYSE: PES; “Pioneer” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-31425. In their lead Petition, the Debtors, who provide land-based drilling services and production services in the United States and Colombia, noted estimated assets of $689.7mn and estimated liabilities of $576.5mn. 

The Debtors' cases (Plan confirmation hearing originally scheduled for April 15th) have been significantly delayed by the COVID-19 pandemic, with a group of noteholders arguing that the coronavirus provided them with an out as to their commitments. Prepetition, those noteholders, led by Credit Suisse Asset Management, LLC, DW Partners, LP, and Whitebox Advisors LLC,  had otherwise signed onto the Debtors' restructuring support agreement and a backstop commitment agreement ("RSA" and "BCA," respectively, see more as to each below) throwing their support (and cash) behind the Debtors' prepackaged Plan. The Debtors had countered [see Docket No. 300] with an argument that has now won the day (both the RSA and BCA specifically endorsed by the Court's order), namely that the pandemic was well known to all of the signatories to the RSA and BCA and could not therefor constitute the "Material Adverse Effect" claimed by the objecting noteholders: 

"These restructuring successes notwithstanding, three members of the Ad Hoc Noteholder Group who signed the RSA and BCA—Credit Suisse Asset Management, LLC, DW Partners LP, and Whitebox Advisors LLC (the 'Minority Objecting Noteholders')—now object to final approval of the Disclosure Statement and confirmation of the Plan in an attempt to evade their funding commitments under the Plan. This is the sole objection to the Plan and Disclosure Statement. All of the other stakeholders in the Debtors’ capital structure, including the remaining members of the Ad Hoc Noteholder Group, support the Plan, and with good reason. The objection is meritless and should be assessed in light of the extensive and hard-fought negotiations that occurred prior to the filing of these prepackaged Chapter 11 Cases. 

The primary ground on which the Minority Objecting Noteholders pin their objection is that, since February 28, 2020, a “Material Adverse Effect” (as defined in the BCA) has occurred that excuses them from funding their portion of the Rights Offering (49.94% of the total). The MAE claim, however, fails as a matter of law. The “new reality” facing the economy and oil and gas industry that the Minority Objecting Noteholders allege renders the Plan infeasible is the result of conditions that appeared prior to the time the parties signed the RSA and BCA."

Plan Overview

The Debtors' memorandum in support of Plan confirmation [Docket No. 300] provides: "The Plan deleverages and right-sizes the Debtors’ balance sheet with the support of all voting classes of Claims and Interests. Specifically, the Plan eliminates nearly $267 million in debt, provides a 100% recovery to Allowed General Unsecured Claims and all creditors who are unimpaired under the Plan, equitizes approximately $300 million of prepetition Notes Claims and provides a capital infusion of approximately $120 million through a backstopped Rights Offering."

The Disclosure Statement [Docket No. 16] provides: “Taken as a whole, the Restructuring achieves:

•  a 100% recovery to Allowed General Unsecured Claims and all other creditors who are Unimpaired under the Prepackaged Plan; and
•  deleveraging the Company’s balance sheet by (i) equitizing approximately $300 million of prepetition Notes Claims with the consent of an overwhelming amount of the Notes Claims, and (ii) refinancing of $175 million of Prepetition Term Loan Claims with the proceeds of the New Secured Bonds and Rights Offering.

In addition, the Prepackaged Plan provides for a substantial capital infusion into the Company through a new money Rights Offering to raise up to $125 million through the issuance of the Rights Offering Convertible Bonds (the “Rights Offering Amount”) and Management Commitment Convertible Bonds.  

Lastly, the Company will seek to issue New Secured Bonds in the amount of $78.125 million consistent with the terms set forth in the New Secured Bond Term Sheet and otherwise to be determined. The proceeds of the New Secured Bonds will be used to refinance the Prepetition Term Loan Facility.”

Restructuring Support Agreement

On February 28, 2020, the Debtors entered into a restructuring support agreement (the “RSA”) with (i) lenders holding over 99% in the aggregate amount outstanding under their prepetition term loan facility, and (ii) members of an Ad Hoc Noteholder Group holding approximately 75.9% in the aggregate of the principal amount outstanding under their 2022 6.125% senior unsecured notes.

The RSA envisions a balance sheet restructuring of the Company’s funded indebtedness and an infusion of up to $125 million in new money through a partially backstopped rights offering and management commitment. Key terms include (see Exhibit B to Disclosure Statement for RSA and related term sheet):

• The repayment in full in Cash of the Prepetition Term Loan Claims with the proceeds of the New Secured Bonds and Rights Offering. The New Secured Bonds will mature five (5) years from issuance and bear cash interest at a rate of LIBOR plus 9.5%.
• The exchange of the existing Notes Claims for (a) 94.25% of the New Equity (subject to dilution from the conversion of the New Convertible Bonds and the Employee Incentive Plan) and (b) the right to participate in the Rights Offering on a pro rata basis for the purchase of 94.25% of the New Convertible Bonds to be issued by Reorganized Pioneer pursuant to the Rights Offering.
• To the extent holders of Pioneer Interests vote to accept the Prepackaged Plan, holders of Pioneer Interests will receive (a) 5.75% of the New Equity (subject to dilution from the conversion of the New Convertible Bonds and the Employee Incentive Plan) and (b) the right to participate in the Rights Offering on a pro rata basis for the purchase of 5.75% of the New Convertible Bonds to be issued pursuant to the Rights Offering, even though the valuation of the Debtors set forth in this Disclosure Statement does not merit any distribution to holders of Pioneer Interests.
• The Rights Offering will be partially backstopped by the Consenting Noteholders pursuant to the Backstop Commitment Agreement.
• Certain members of the Company’s senior management will purchase approximately $1.795 million of New Convertible Bonds pursuant to the Backstop Commitment Agreement.
• The total outstanding principal amount of New Convertible Bonds upon issuance will be up to $135 million, inclusive of the Backstop Commitment Premium (as defined below) and the New Convertible Bonds will mature in 5 years and 6 months from issuance and bear payable-in-kind interest at 5%.

The summary of classes, claims, voting rights, and projected recoveries (defined terms are as defined in the Disclosure Statement)

• Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 3 (“ABL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 4 (“Prepetition Term Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 5 (“Notes Claims”) is impaired and entitled to vote on the Plan. Expected recovery is 4-32%. Each Holder of an Allowed Notes Claim shall receive its pro rata share of (i) 94.25% of the New Equity (and, if Class 10 does not vote to accept the Plan, such percentage will increase to 100%), subject to dilution by the New Equity issued upon conversion of the New Convertible Bonds (inclusive of the Management Commitment Convertible Bonds, the Rights Offering Convertible Bonds and the Premium Convertible Bonds) and the Employee Incentive Plan and (ii) Subscription Rights to acquire its pro rata share of $116,121,000 in New Convertible Bonds (and the corresponding Stapled Special Voting Stock) in accordance with the Rights Offering Procedures.
• Class 6 (“General Unsecured Claims”) is unimpaired, deemed to accept, and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 7 (“Intercompany Claims”) is unimpaired, deemed to accept, and not entitled to vote on the Plan. Expected recovery is NA.
• Class 8 (“Subordinated Claims”) is impaired, deemed to reject, and entitled to vote on the Plan. Expected recovery is 0%. All Allowed Subordinated Claims, if any, shall be discharged, cancelled, released, and extinguished, and will be of no further force or effect. No Holder of Allowed Subordinated Claims will receive any distribution or recovery on account of such Allowed Subordinated Claims.
• Class 9 (“Intercompany Interests”) is unimpaired, deemed to accept, and not entitled to vote on the Plan. Expected recovery is NA.
• Class 10 (“Pioneer Interests”) is impaired and entitled to vote on the Plan. Expected recovery is $700k-$6.0mn. Each Holder of an Allowed Pioneer Interest shall receive:

If Class 10 votes to accept the Prepackaged Plan, its Pro Rata share of (i) 5.75%  of  the  New  Equity, subject to dilution by the New Equity issued upon conversion of the New Convertible Bonds (inclusive of the Management Commitment Convertible Bonds, the Rights Offering Convertible Bonds and the Premium Convertible Bonds) and the Employee Incentive Plan and (ii) Subscription Rights to acquire its Pro Rata share of $7,084,000 in New Convertible Bonds (and the corresponding Stapled Special Voting Stock) in accordance with the Rights Offering Procedures.

If Class 10 does not vote to accept the Prepackaged Plan, its Pro Rata share of Subscription Rights to acquire its Pro Rata share of $7,084,000 in New Convertible Bonds (and the corresponding Stapled Special Voting Stock) in accordance with the Rights Offering Procedures.

Voting Result

On April 30, 2020, the Debtors' claims agent notified the Court of the Plan voting result [Docket No. 279]. There were two voting classes and each of them voted to accept.

The voting results were as follows:

• Class 5 (“Notes Claims”) – 119 claims holders, representing $154,916,000 (or 99.36%) in amount and 99.17% in number, accepted the Plan. 1 claims holders, representing $1,000,000 (or 0.64%) in amount and 0.83% in number, rejected the Plan.
• Class 10 (“Pioneer Interests”) – Holders representing $20,020,889 (or 90.39%) accepted the Plan, Holders representing $2,129,659 (or 9.61%) rejected the Plan.

Prepetition Capital Structure

As of the Petition Date, the Debtors had approximately $475.0mn in principal amount of total funded indebtedness comprised of:

1. approximately $175.0mn in principal amount outstanding under the Prepetition Term Loan Credit Agreement and
2. approximately $300.0mn in principal amount outstanding under their 6.125% senior unsecured notes due March 15, 2022.

Events Leading to the Chapter 11 Filing

The Debtors' Disclosure Statement provides a now familiar story (as it highlights itself) for companies operating in the oilfield services industry: lower oil and gas prices resulting in "dramatically curtailed" capex and opex by clients in a sector "saturated with competition" and hamstrung by extensive/expensive regulation. The Disclosure Statement provides the following: "The last few years, however, have seen a significant and sustained drop in oil and gas prices. Oil and gas prices are dependent on factors beyond the Company’s control, including the supply of and demand for oil, weather conditions and political conditions, among others. As a result of this sustained market downturn, oil and gas companies around the world have dramatically curtailed capital and operating expenditures dedicated to oil and gas exploration, development and production. This, in turn, has caused a commensurate drop in demand for the products and services offered by Pioneer and its competitors….The sustained drop in oil and gas prices has impacted companies throughout the oil and gas industry including Pioneer and the majority of its customers. 

In addition to the issues facing the oil and gas industry generally, Pioneer operates in a highly competitive market. The oilfield services industry is saturated with competition from various companies that operate in the same sectors and the same regions of the world as Pioneer. The primary competitive factors that Pioneer faces include safety, performance, price, quality and breadth of products and services. Pioneer also faces competition from regional suppliers in some of the sectors in which it operates as these suppliers provide mobile equipment that can be moved from one market to another in response to market conditions. This heavily competitive market has impacted the Company’s ability to maintain its market share and defend or maintain the pricing for its services. Heavy competition has also impacted the Company’s ability to negotiate favorable contract terms with its customers and suppliers, which, on occasion has resulted in the Company accepting suboptimal terms. The Company’s operations are also subject to extensive federal, international, state and local laws and regulations governing environmental quality, pollution control, remediation of contamination, preservation of natural resources, transportation, work safety and other matters. Compliance with the various requirements imposed by these laws and regulations has also resulted in increased capital expenditures as companies in these sectors have had to make significant investments to ensure compliance."

Corporate Structure Chart (see Exhibit C of Disclosure Statement)

Liquidation Analysis (See Exhibit E of Disclosure Statement for notes)

About the Debtors

The Debtors provide land-based drilling services and production services to a diverse group of oil and gas exploration and production companies in the United States and internationally in Colombia. 

Pioneer has over fifty-one (51) years of experience assisting its customers with streamlining all aspects of their oilfield operations, from providing services prior to initial production through production, maintenance and eventual well abandonment. Pioneer was incorporated under the laws of the state of Texas in 1979 as the successor to a business that had been operating since 1968. At that time, Pioneer had three land drilling rigs. Since then, Pioneer has expanded through a combination of organic growth and targeted acquisitions, including the 2008 acquisition of WEDGE Well Services, LLC, WEDGE Wireline Services, LLC and certain of their affiliates and the 2011 acquisition of Go Coil, LLC, which form the basis of the Company’s well servicing, wireline and coiled tubing services, respectively. 

As of the Petition Date, Pioneer has twenty-five (25) drilling rigs, 123 well servicing rigs, ninety-three (93) wireline services units and nine (9) coiled tubing services units. Until recently, the common stock of Pioneer Energy was traded on the New York Stock Exchange (“NYSE”) under the symbol “PES.” The NYSE, however, delisted the common stock due to its low trading price levels in September 2019.

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