[Developing Story] May 22, 2020 – Unit Corporation and five affiliated Debtors (NYSE: UNT; "Unit” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-32740. The Debtors, a Tulsa-based oil and gas E&P company, are represented by Harry Perrin of Vinson & Elkins L.L.P. Further board-authorized engagements include (i) Opportune LLC as financial advisors, (ii) Evercore Group L.L.C. as investment bankers, (iii) Grant Thornton LLP as tax advisors and (iv) Prime Clerk as claims agent.
The Debtors’ lead petition notes between 200 and 1,000 creditors, estimated assets of $2.09bn and estimated liabilities and $1.034bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Wilmington Trust, National Association (Trustee for $650.0mn 6.625% senior subordinated notes due 2021), (ii) Northern Energy Services LLC ($1.1mn trade debt claim) and (iii) Cruz Energy Services ($699k trade debt claim).
Highlights
- Commodity price fall, COVID-19 and Saudi/Russia price fight leave revenues down, liquidity untenable
- RBL Facility borrowing base reductions and likely acceleration of maturity date to November 2020 left Debtors with few options
- RSA supported by 70% of Subordinated Noteholders and Senior Lenders
- Noteholders to exchange $650.0mn of 2021 notes for equity in emerged Debtors
- Senior lenders to provide $36.0mn of new money DIP financing ($18.0mn interim and $18.0mn final), convert existing RBL facility borrowing and DIP borrowings to $180.0mn exit facility
- Debtors choose restructuring path as "current market conditions are not conducive to a sale process"
Press Release
In a press release announcing the filing, the Debtors advised that they had filed Chapter 11 petitions to "effectuate a pre-negotiated Chapter 11 plan of reorganization (the 'Plan') that will reduce the Company’s funded debt obligations by more than $650 million and right-size the Company’s balance sheet for go-forward operations.
The Chapter 11 petitions were filed in accordance with a Restructuring Support Agreement (the 'RSA') between the Company, the holders of more than 70% of the Company’s 6.625% senior subordinated notes due 2021 (the 'Subordinated Notes') and all of the lenders under the Company’s Senior Credit Agreement (the 'RBL Lenders'). The RSA sets forth the principal terms of the restructuring transaction that will be effectuated by the Plan, including an equitization of all of the outstanding Subordinated Notes and the replacement of the existing RBL facility [$139.0mn outstanding at Petition date] and the DIP financing with a $180 million exit financing facility. Consummation of the Plan will be subject to confirmation by the Court and other conditions in the Plan, the RSA and related transaction documents."
Restructuring Support Agreement and Plan Overview
On May 22, 2020, the Debtors, an ad hoc group of holders of the Subordinated Notes holding more than 70% of the principal amount of the Subordinated Notes (collectively, the “Consenting Noteholders”), and the RBL Lenders entered into a restructuring support agreement (the “RSA”), key terms of which nclude:
- The DIP Lenders (as defined in the RSA) agree to provide the Company with a senior secured superpriority credit facility in an aggregate principal amount of
$36 million of new money term loans, of which $18 million shall be available on an interim basis and the remaining $18 million shall be available on a final basis; - Pursuant to the to-be-filed chapter 11 plan of reorganization (the “Plan”), the Consenting Noteholders agree to convert their claims arising under the Subordinated Notes Indenture (the “Subordinated Notes Claims”) for each holder’s pro rata shares of equity pools at each of Unit Corp., UDC, and UPC;
- On the Plan effective date, the RBL Lenders agree to provide the Company with a senior secured revolving credit facility in an amount equal to $140 million and a senior secured term loan facility in an amount equal to $40 million (the “Exit Facility”) and will receive an exit fee of 5% of the interests in Unit Corp., as reorganized after the Plan effective date (“Reorganized Unit Corp.”) (subject to dilution on account of the MIP Equity and Warrant Package (as such terms are defined below));
- Pursuant to the Plan, each allowed holder of claims arising under the RBL Facility will receive its pro rata share of revolving loans, term loans, and letter-of-credit participations under the Exit Facility;
- Pursuant to the Plan, each holder of an allowed general unsecured claim against Unit Corp. or UPC will receive its pro rata share of the interests in Reorganized Unit Corp. from the Unit Corp. or UPC general unsecured creditor equity pools, respectively;
- Pursuant to the Plan, each holder of an allowed general claim against UDC will be paid in full in cash in the ordinary course of business;
- Pursuant to the Plan, a post-emergence management incentive plan shall be established and adopted by the new board of Reorganized Unit Corp. representing 7% of the interests in Reorganized Unit Corp. on a fully diluted basis (the “MIP Equity”); and
- Pursuant to the Plan, each holder of Unit Corp. equity interests that does not opt out of the releases under the Plan will receive its pro rata share of out-of-the-money warrants exercisable for an aggregate of 12.5% of the interests in Reorganized Unit Corp. (the “Warrant Package”).
Events Leading to the Chapter 11 Filing
In a declaration in support of the the Debtors' proposed debtor-in-possession ("DIP") financing (the “Yi Declaration”), Bo S. Yi, an Evercore Managing Director, detailed the events leading to Unit's Chapter 11 filing. For the Debtors, a now familiar story, with commodity price declines creating pressure from 2014 and then brewing inexorably over the last year to create the perfect storm in the guise of COVID-19 and the Saudi/Russian price war. Diminished revenues ultimately leading to impossibly tight liquidity; with the Debtors' senior lenders reducing the borrowing base by $75.0mn in January 2020 and then threatening to do so again in April. The latter borrowing base reduction would have reduced borrowing headroom below what had in fact already been borrowed, with the Debtors without any prospect of paying down what would have been then been due in respect of their senior facility. In the short-term, the impact of a second borrowing base reduction was staved off with a standstill agreement and a series of extensions to that agreement.
The Yi Declaration provides: "Significant distress resulting from a sustained decline in commodity prices started affecting the oil and gas industry in 2014 and has persisted thereafter. More recently, these issues were exacerbated by the significant decline in global demand for crude oil spurred by the COVID-19 pandemic and related governmental actions, and a surplus of hydrocarbon supply resulting from excess production by members of the Organization of Petroleum Exporting Countries and other countries, including Russia. Cumulatively, these factors have created challenges in the energy industry and challenging market conditions.
The Company’s liquidity challenges were compounded in January 2020 through a ‘wildcard’ redetermination of the Company’s borrowing base from $275 million to $200 million under the RBL Facility. An additional redetermination was scheduled for April 1, 2020, and could have further reduced liquidity. But on March 11, 2020, with the assistance of Evercore and the Company’s other professionals, the Company, the RBL Lenders, and the RBL Agent entered into a standstill and amendment agreement (as amended, the 'Standstill Agreement'), pursuant to which the RBL Lenders and the RBL Agent agreed to temporarily refrain from exercising certain rights and remedies under the RBL Credit Agreement, including the April 1, 2020 scheduled redetermination. In exchange, the Company agreed to limit subsequent borrowings under the RBL Credit Agreement to $15 million, net of any repayments or prepayments of loans occurring after entry into the Standstill Agreement. The Standstill Agreement was amended on April 15, 2020, on April 17, 2020, on May 4, 2020, on May 15, 2020, and again on May 22, 2020, which extended the standstill period until May 22, 2020, providing the parties with additional time to negotiate proposals regarding credit matters and the Company’s restructuring prior to May 22, 2020 (the 'Petition Date')."
Even if the Debtors had been able to get past the current liquidity crisis, a second, larger one loomed just over the horizon. Yi explains: "The RBL Facility’s scheduled maturity date is October 18, 2023, but such maturity date accelerates to November 16, 2020, if, on or before that date, the Subordinated Notes have not been repurchased, redeemed, or refinanced with indebtedness having a maturity date at least six months following October 18, 2023. I understand that the Company believes the likelihood of successfully retiring the Subordinated Notes in time to avoid the RBL Facility’s springing maturity is extremely low. Based on my work with the Company and knowledge of conditions in the financing market, I agree with the Company’s assessment.
In light of the challenges facing the energy industry and general economy, the Company, with the assistance of Evercore and the Company’s other professionals, concluded that current market conditions are not conducive to a sale process for the Company’s assets. Moreover, the Company’s funded debtholders agreed with this assessment and supported a standalone restructuring. Based on my professional experience and my involvement in the Company’s negotiations, I believe that the Restructuring is the best available option for the Company under the circumstances. In addition to providing critical funding to support the business and fund a chapter 11 process that is supported by the Company’s largest stakeholders, the Restructuring also has the potential to provide significant value to unsecured creditors of certain Debtors, preserve jobs, and substantially reduce potential WARN Act liabilities."
Significant Shareholders
- Black Rock, Inc.: 14.28%
- FMR LLC: 11.71%
- The Vanguard Group: 10.32%
- Dimensional Fund Advisors LP: 8.15%
- Victory Capital Management Inc.: 5.85%
About the Debtors
Unit Corporation is a Tulsa-based, publicly held energy company engaged through its subsidiaries in oil and gas exploration, production, contract drilling and natural gas gathering and processing. The Company’s Common Stock is listed on the New York Stock Exchange under the symbol UNT.
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