EP Energy Corporation – Court Confirms (Again) Debtors’ Plan of Reorganization; Star-Crossed Debtors Anticipate Emergence by October 1st, $4.4bn Debt Reduction

August 27, 2020 – The Court hearing the EP Energy Corporation cases has confirmed the Debtors Modified Fifth Amended Plan. The Court has yet to issue a confirmation order but a proposed Plan confirmation order was filed by the Debtors on August 27th [Docket No. 1409].  

On October 3, 2019, publicly-traded, EP Energy Corporation and seven affiliated Debtors (NYSE: EPE, “EP Energy” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-35654. At filing, the Debtors, a Houston-based independent energy company focused on the acquisition, production, exploration, and development of onshore oil and gas assets in the United States, noted estimated assets of $4.19bn and estimated liabilities of $4.98bn.

In a press release announcing the Plan's confirmation, the Debtors states: "Upon emergence, EP Energy will reduce its debt by approximately $4.4 billion and receive $629 million in senior secured exit financing from the Company's existing revolving loan lenders. In total, the restructuring process will have eliminated approximately 90% of pre-petition funded debt and over 90% of pre-petition annual cash interest expense. Following completion of the process, EP Energy expects to have less than $500 million of debt and a new three-year reserve based loan credit facility.   

The Company expects to complete its financial restructuring process and emerge from Chapter 11 bankruptcy protection by October 1, 2020."

Second Time Lucky?

Previously on March 23, 2020, the Court hearing the EP Energy cases withdrew the confirmed status of the Debtors’ star-crossed (and coronavirus-crossed) Plan which it had confirmed on March 6th.

Commenting on the long path back to the cusp of emergence from bankruptcy, the Debtors provide: "Unfortunately, in the days following the Bankruptcy Court’s oral ruling confirming the Prior Plan on March 6, 2020, Saudi Arabia and Russia implemented price reductions that severely affected the price of oil and gas, causing United States oil prices to fall by more than 30%. The spread of the disease caused by the novel coronavirus ('COVID-19') also resulted in the crash of financial markets. As a result, the Debtors became unable to satisfy all of the conditions to the effectiveness of their exit facility and therefore could not consummate the Prior Plan…. 

Following entry of the Vacatur Order, oil prices continued to fall and, in fact, for the first time in history, U.S. crude oil futures dropped to below zero (as low as -$37 per barrel for crude oil), presenting further challenges for the Debtors. The Debtors were proactive in responding to these challenges by, among other things, (i) developing a new business plan, (ii) exploring strategic alternatives with their advisors, (iii) engaging in discussions with several of their major stakeholders, including the RBL Lenders…and the advisors to the Ad Hoc Group, regarding potential paths forward, and (iv) taking steps to reduce costs, including rejecting several burdensome executory contracts and implementing a reduction in their workforce. Moreover, as of the date hereof, oil prices have risen from their record lows, helping to facilitate a path forward toward emergence from these Chapter 11 Cases."

Also helping facilitate a path forward, is the collapse of the class structure, with holders of the Debtors' 1.25L Notes Claims ($500.0mn) and 1.5L Notes Claims ($2.2bn) sliding painfully down the waterfall to join general unsecured creditors in Class 5A where they will receive nothing. Holders of the Debtors' 1.125L Notes claims, previously slated to recover 100% in the form of reinstated notes, will now receive the 100% of the emerged Debtors' equity that had previously been allocated to holders of the 1.5L Notes. The painful result means that the Debtors will emerge will a headline debt reduction number of $4.4bn, an increase of $1.1bn (to $4.4bn) over the March 6th Plan.

Plan Overview

The present Disclosure Statement states, “The Plan provides for a comprehensive restructuring of the Company’s balance sheet. The transactions contemplated in the Plan will strengthen the Company by substantially reducing its debt and preserve in excess of 450 jobs. Specifically, the proposed restructuring contemplates, among other things:

• a reduction of current debt on the Debtors’ balance sheet by approximately $4.4 billion,
• access to an approximately $629 million exit credit facility (the ‘Exit Facility’), which RBL Lenders holding 98% of the Claims under the Debtors’ prepetition RBL Facility have committed to provide support for, and which the Debtors’ prepetition RBL Facility and post-petition DIP Facility will ‘roll’ into on the effective date of the Plan (‘Effective Date’).

The Debtors believe that upon consummation of the Plan and the transactions contemplated thereby, the post-emergence enterprise will have the ability to withstand the challenges and volatility of the oil and gas industry and succeed as a leading operator in their three main regions: Northeastern Utah, the Eagle Ford shale in South Texas, and the Permian basin in West Texas.

The Plan provides for the following treatment of claims and equity interests:

• Each holder of an Allowed DIP Claim that executes the Amended Commitment Letter by the Voting Deadline will receive on a dollar-for-dollar basis, first-lien, first-out revolving loans or revolving commitments (as applicable) under the Exit Credit Agreement and letter of credit participations under the Exit Credit Agreement; provided that each holder of an Allowed DIP Claims that does not execute the Amended Commitment Letter by the Voting Deadline shall receive such treatment with respect to its Allowed DIP Claim as may be agreed to or as may otherwise comply with the Bankruptcy Code.
• Each holder of an Allowed RBL Claim that executes the Amended Commitment Letter by the Voting Deadline shall receive on a dollar-for-dollar basis first lien, first-out revolving loans under the Exit Credit Agreement and letter of credit participations under the Exit Credit Agreement; provided that each holder of an Allowed RBL Claim that does not execute the Amended Commitment Letter by the Voting Deadline shall receive, on a dollar-for-dollar basis, first lien, second-out term loans under the Exit Credit Agreement.
• Holders of Allowed 1.125L Notes Claims will receive on account of such Allowed 1.125L Notes Claim, in full and final satisfaction of such Allowed 1.125L Notes Claim, their Pro Rata share of 100% of the New Common Shares (which shall be distributed to holders of Allowed 1.125L Notes Claims on or about the Effective Date), subject to dilution solely by the EIP Shares.
• Holders of Allowed Unsecured Claims (i.e., 1.25L Notes Claims, 1.5L Notes Claims, Unsecured Notes Claims, and General Unsecured Claims, but not Convenience Class Claims (defined below)) will not receive any distribution on account of such Allowed Unsecured Claims. Although holders of Unsecured Claims are receiving no recovery under the Plan, following discussions with the Creditors’ Committee, the Plan provides for payment of the reasonable and documented compensation, fees, expenses and disbursements incurred by the 1.25L Notes Trustee, the 1.5L Notes Trustees, and the Unsecured Notes Trustees. In addition, the Debtors have agreed to waive Avoidance Actions against Ongoing Trade Parties following the Effective Date.
• Holders of Parent Unsecured Claims will receive, on the later of (i) the Effective Date, and (ii) the date on which such Parent Unsecured Claim becomes Allowed, or, in each case, as soon as reasonably practicable thereafter, the lesser of (a) payment in cash of 100% of such Allowed Parent Unsecured Claim, or (b) its Pro Rata share of the Cash on EP Energy’s balance sheet on the Effective Date.
• Holders of Allowed Convenience Claims (i.e., Claims that would otherwise be a General Unsecured Claim but are (i) Allowed in the amount of $100,000 or less, or (ii) irrevocably reduced to the Convenience Claim Amount at the election of the holder on a Class 6 Ballot in accordance with the Plan) will receive the lesser of (a) payment in Cash of 10% of such Allowed Convenience Claim, or (b) their Pro Rata share of the Convenience Claim Distribution Amount which is $175,000.
• Holders of Existing Parent Equity Interests will receive, on account of available assets of EP Energy, their Pro Rata share of $300,000 in Cash.”

The following is an updated summary of classes, claims, voting rights, and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):

• Class 1 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 3 (“RBL Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $314.7mn and expected recovery is 100%. Each holder will receive, on a dollar-for-dollar basis first lien, first-out revolving loans under the Exit Credit Agreement and letter of credit participations under the Exit Credit Agreement; provided that each holder of an Allowed RBL Claim that does not execute the Amended Commitment Letter by the Voting Deadline shall receive, on a dollar-for-dollar basis, first lien, second-out term loans under the Exit Credit Agreement.
• Class 4 (“1.125L Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.0bn and expected recovery is 38.53%. Holder shall receive on account of such Allowed 1.125L Notes Claim, in full and final satisfaction of such Allowed 1.125L Notes Claim, its Pro Rata share of 100% of the New Common Shares (which shall be distributed to holders of Allowed 1.125L Notes Claims on or about the Effective Date), subject to dilution on the Effective Date solely by the EIP Shares. On the Effective Date the 1.125L Notes Indenture will be cancelled, released, and extinguished and will be of no further force or effect except as set forth herein, whether surrendered for cancellation or otherwise. FN: For simplicity, the estimated Allowed amount of 1.125L Notes Claims includes the aggregate original principal amount of $1.0bn plus any “Applicable Premium” due under the 1.125L Notes Indenture, accrued and unpaid interest thereon and any other amounts due under the 1.125L Notes Indenture and applicable law.
• Class 5A (“Unsecured Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $3.5bn and expected recovery is 0%.
• Class 5B (“Parent Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $692.36mn and expected recovery is 100%. Holder shall receive, on the later of (i) the Effective Date, and (ii) the date on which such Parent Unsecured Claim becomes Allowed, or, in each case, as soon as reasonably practicable thereafter, the lesser of (a) payment in cash of 100% of such Allowed Parent Unsecured Claim, or (b) its Pro Rata share of the Cash on EP Energy’s balance sheet on the Effective Date.
• Class 6 (“Convenience Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.75mn and expected recovery is 10%. Holders shall receive, on the later of (i) the Effective Date and (ii) the date on which such Convenience Claim becomes Allowed, or, in each case, as soon as reasonably practicable thereafter, the lesser of (a) payment in Cash of 10% of such Allowed Convenience Claim, or (b) its Pro Rata share of the Convenience Claim Distribution Amount. Allowed Convenience Claims shall not include interest from and after the Petition Date or include any penalty on such Claim.
• Class 7 (“Intercompany Claims”) is unimpaired, deemed to accept, and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 8 (“Subordinated Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 9 (“Existing Parent Equity Interests”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A. Each holder shall receive its Pro Rata share of $300,000 in Cash. On the Effective Date, Existing Parent Equity Interests will be cancelled, released, and extinguished and will be of no further force or effect, whether surrendered for cancellation or otherwise.
• Class 10 (“Other Equity Interests”) is impaired, deemed to reject, and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 11 (“Intercompany Interests”) is unimpaired, deemed to accept, and entitled to vote on the Plan. The aggregate amount of claim is N/A and expected recovery is N/A.

Voting Results

On August 24, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 1400], which were as follows:

• Class 3 (“RBL Claims”) – 11 claim holders, representing $314,710,456.00 in amount and 100% in number, accepted the Plan.
• Class 4 (“1.125 Notes Claims”) – 188 claim holders, representing $920,029,000.00 in amount and 100% in number, accepted the Plan.
• Class 5B (“Parent Unsecured Claims”) – 5 claim holders, representing $0.00 in amount and 100% in number, rejected the Plan.
• Class 6 (“Convenience Claims”) – 13 claim holders, representing $287,559.19 (or 74.20%) in amount and 72.22% in number, accepted the Plan. 5 claim holders, representing $100,004.00 (or 25.80%) in amount and 27.78% in number, rejected the Plan.
• Class 9 (“Existing Parent Equity Interests”) – 6,971,394 shares, 17.13% in number accepted the Plan and 33,715,939 shares, 82.87% in number rejected the Plan.

Key Documents

Th following documents were attached to the Disclosure Statement [Docket No. 1345]:

• Exhibit A: Plan
• Exhibit B: Amended Commitment Letter
• Exhibit C: Organizational Chart
• Exhibit D: Liquidation Analysis
• Exhibit E: Financial Projections
• Exhibit F: Valuation Analysis
• Exhibit G: Release Provisions

The Debtors filed Plan Supplements at Docket Nos. 1360, 1384 and 1408 which attached the following documents:

• Exhibit A: Bylaws of Reorganized EP Energy Corporation [Docket No. 1360]
• Exhibit B: Certificate of Incorporation of Reorganized EP Energy Corporation [Docket No. 1360]
• Exhibit C: Stockholders Agreement for Reorganized EP Energy Corporation [Docket No. 1360]
• Exhibit D: Initial Board of Directors of Reorganized EP Energy Corporation [Docket No. 1408]
• Exhibit E: Employee Incentive Plan Term Sheet [Docket No. 1360]
• Exhibit F: Exit Credit Agreement [Docket No. 1360]
• Exhibit G: Schedule of Retained Causes of Action [Docket No. 1360]
• Exhibit H: Schedule of Rejected Contracts [Docket No. 1384]
• Exhibit I: New Executive Employment Agreement Term Sheet [Docket No. 1360]
• Exhibit J: New Common Share Distribution Procedures [Docket No. 1360] 

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Rush Declaration”) [Docket No. 16], David Rush, the Debtors' Chief Restructuring Officer (on loan from FTI) detailed the events leading to EP’s Chapter 11 filing. It is a now familiar story of lower commodity prices, declining revenues and an inability to service debt; in this case the Debtors facing an annual interest expense bill of $365.0mn ($1.0mn a day) in respect of their almost $5.0bn of debt. 

The Rush Declaration states: "As has been well documented, the distressed market conditions in the oil and gas industry, which began in 2014, have negatively impacted all levels of the industry, including upstream companies that produce oil and gas. As evidenced by the numerous chapter 11 filings or other announcements of debt restructurings in the industry, the impact of the volatility of the commodity markets on the Company’s businesses is clear. Notably, oil and natural gas prices dropped precipitously in 2014 and 2015 and have held at depressed levels for the last several years. Both the decline and the length of this trough have been greater than what anyone in the business could have reasonably anticipated, resulting in a substantial decline in revenue, reserves, and asset values across the industry

When the Company was formed, during the first quarter of 2012, West Texas Intermediate (“WTI”) spot price averaged approximately $103 per barrel (“Bbl”), and in 2014, WTI spot price still averaged approximately $93 Bbl. In contrast, in 2015, the WTI spot price averaged approximately $48 per Bbl, and in 2016, the WTI spot price dropped at one point to below $27 per Bbl. In 2017, the WTI spot price stabilized at around $50 Bbl, and returned as high as $76 Bbl in 2018, but in 2019 has dropped precipitously again to an average of $57 Bbl (as of September 16, 2019). Similarly, the price of natural gas has dropped from an average of $4.37 in 2014 to an average of $2.62 YTD in 2019 (as of September 16, 2019).

The Company, of course, has not been immune to these adverse market conditions and the impact on its reserves, cash flow, and ability to service its outstanding indebtedness. As with many of its peers, this drastic and prolonged drop in prices and the severe dislocations it caused to the Company’s operations have impacted the Company’s asset base and put the Company in a stressed liquidity situation. For example, in 2015, the company recorded a $4.3 billion impairment charge to the carrying value of its Eagle Ford assets, largely as a result of the significant drop in estimated future cash-flows from the company’s reserves due to lower commodity prices. More recently, the Company’s natural gas revenues decreased by approximately $35 million year-over-year (32%) in 2018 due primarily to lower natural gas prices. Similarly, largely on account of the drop in oil prices, oil revenues decreased by approximately $136 million year-over-year (25.5%) for the six-month period ending June 30, 2019. In fact, as a 29 result of the decline in commodity prices since the third quarter of 2018 and the attendant reduction in future development capital allocated to the Permian basin, the Company incurred non-cash impairment charges of approximately $1.103 billion in the Permian basis in the fourth quarter of 2018.”

Significant Prepetition Shareholders

• Affiliates of Apollo Global Management LLC: 39.0% 
• Korea National Oil Corporation: 12.3% 
• Affiliates of Riverstone Holdings LLC: 12.3% 
• Access Industries, Inc.: 13.7%

Liquidation Analysis (see Exhibit D to Disclosure Statement for notes)

About the Debtors

EP operates as an independent exploration and production company engaged in the acquisition and development of unconventional onshore oil and natural gas properties in the United States. In 2018, EP had operating revenues of approximately $1.324 billion. The Company’s revenues are generated primarily through the physical sale of oil, natural gas, and natural gas liquids to third-party customers at spot or market prices under both short and long-term contracts, as well as settlements of the Company’s in-the-money commodity hedge positions. The Debtors operate through a diverse base of producing assets and is focused on the development of drilling inventory located in three areas: the Eagle Ford Shale in South Texas, the Permian basin in West Texas, and Northeastern Utah.

The Debtors describe themselves as follows: "At EP Energy, we’re driven to deliver superior returns for our investors by developing the oil and natural gas that feeds America’s growing energy needs. Our high-quality asset portfolio includes programs in the Eagle Ford, Permian, and Northeastern Utah areas. We have a diverse asset base with significant reserves and large positions in our core development programs.

• In the Eagle Ford in south Texas, we operate a low-cost, capital-efficient program with favorable market pricing.                  
• In the Permian of west Texas, our program includes a significant reserve base and multi-decade drilling inventory.              
• In the Northeastern Utah, our program is focused on delivering strong performance from a rich resource base.

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