⛽️Is Oil & Gas Distress Back?⛽️

Alta Mesa, Diesel Jeans, Purdue Pharma & Feedback

Oil and Gas Faces Headwinds Again (Long Flights to TX).

Restructuring in the oil and gas space has been quiet of late but we here at PETITION suspect that may change very soon. While oil has been on the rise (in the mid-60s at the time of this writing) — and there are both potential political and supply-side roadblocks growing domestically that may help push prices upward — there nevertheless appear to be cracks forming. We’ve already noted that Jones Energy ($JONE), Sanchez Energy Corporation ($SN), Southcross Energy Partners LP ($SXEE), and Vanguard Natural Resources all look distressed and headed towards chapter 11 bankruptcy filings (or a chapter 22 filing, as the case may be with Vanguard). Recent price action for several other companies also reflects some doubt about the oil and gas space.

Take, for instance, Alta Mesa Holdings LP ($AMR). Per The Houston Chronicle:

Houston oil and gas company Alta Mesa Resources is struggling to stay afloat, laying off roughly one-fourth of its employees and writing down the value of its assets by $3.1 billion because of admitted failures in its financial reporting.

The company's three top executives, CEO Hal Chappelle, Chief Operating Officer Michael Ellis and Chief Financial Officer Michael McCabe, resigned abruptly a few weeks ago.

The company disclosed in an SEC filing that the write-down stems from “ineffective internal control over financial reporting due to an identified material weakness.” We’re conjecturing here, but that sure sounds like diplomatic Texan for “we effed up pretty badly…perhaps even fraudulently.” Consequently, the plaintiffs’ lawyers are circling this puppy like vultures and, well, this:

Indeed, the bonds are getting “smoked.” The company’s $500mm 7.875% senior unsecured bonds due 2024 dipped down over 40% in a week and approximately 50% versus a month ago. This chart is BRUTAL:

We’ll take a deeper dive into Alta Mesa soon for our Members: if you’re not a Member well, we hope you revel in ignorance.

In the meantime, take a look at the price action of once-bankrupt Chaparral Energy Inc. ($CHAP): in the last week it saw its stock collapse over 20% and its $300mm 8.75% senior unsecured notes due 2023 fall nearly 17%. More debt chart BRUTALITY here:

Now, we’re not saying either of these companies are filing for BK next week. But, we are saying they are, at a minimum, ripe for some advising.

Long trips to Texas.

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Meanwhile, last week Weatherly Oil & Gas LLC, an oil and gas acquisition and exploration company focused on Arkansas, Louisiana and Texas filed for bankruptcy in the Southern District of Texas; it operates over 800 well bores (over half shut-in or non-producing) on 200k net acres. The company blames continued low commodity prices and fundamentally changed lending practices for its bankruptcy. Specifically, the company notes:

Lending practices moved from a reserves-based approach to a cash-flow based approach, limiting access to capital growth and forcing the Debtor to utilize free cash flow to pay down senior debt instead of making other capital expenditures.

In other words: banks have finally gotten smarter and no longer defer to wildcats as much as they used to. It’s amazing what dozens of bankruptcies and billions of lost dollars over a commodity downturn will do isn’t it? Anyway, without capital and with an expensive production focus, the company struggled in the face of a glut of competition.

The company has a transaction support agreement pursuant to which it intends to sell its assets to multiple purchasers and then pursue a plan of liquidation. Angelo Gordon Energy Servicer LLC, the company’s pre-petition lender, will provide a $1mm DIP to fund the cases (asset sale proceeds will also apply towards funding the cases).

This was the first E&P filing in a while. It won’t be the last.


Diesel USA Inc. Files for Bankruptcy (Short Misplaced Self-Image)

Three things immediately occurred to us when we saw the news that Diesel USA Inc. filed for bankruptcy in the District of Delaware:

  1. That makes perfect sense — Jersey Shore went off the air a long time ago;

  2. This is “The Mattress Firm Effect” in action — a retailer using a quick trip in bankruptcy to, on an expedited basis, flush out some burdensome leases and otherwise leave parties in interest unimpaired; and

  3. More surprising than the company filing for bankruptcy is the law firm filing it for bankruptcy. Arent Fox LLP, while a fine firm for sure, isn’t exactly known for its debtor-side chops. Just saying.

The numbers around this one are…well…interesting. The company’s brick-and-mortar retail operations consist of 28 retail store locations in 11 states, comprised of 17 full-price retail stores and 11 factory outlet stores. Net sales were:

  • In 2014: $83mm for full-price retail and $42mm for outlet (Total: $125mm); and

  • In 2018: $38mm for full-price retail and $34.5mm for outlet (Total: $72.5mm).

In terms of percentages:

  • In 2014: brick and mortar represented 64% of net sales; and

  • In 2018: brick and mortar represented 70% of net sales.

We see a couple of significant problems here.

Despite the superlatives that the company’s CRO generously uses to describe the company, i.e., “cutting-edge,” and “cultural icon,” the numbers reflect a BRAND — let alone the business — in significant trouble. Sure, net sales are down generally, but the distribution has gotten wildly askew. The numbers reflect a bare reality: Diesel simply isn't a brand people will pay full price for anymore. This couldn’t be more stark. And that’s a big problem when the company is (or was) party to expensive height-of-the-real-estate-market leases in prime locations like Manhattan’s Fifth Avenue. Diesel, quite simply, isn’t “Fifth Avenue,” let alone “Madison Avenue.”* We’re not convinced the company is being realistic when it says that it has “retained a loyal customer base.” The numbers plainly say otherwise. Moreover, in an age where digital sales are increasingly more important, the business has become MORE dependent on brick-and-mortar as opposed to its wholesale and e-commerce channels.**

But don’t take our word for it. Here’s the company’s CRO:

…in 2015 prior management implemented a strategic initiative that was focused on repositioning Diesel stores and products in premium locations and with premium customers so as to place them side-by-side with other premium fashion brands across the retail, online, and wholesale platforms. Unfortunately, since its implementation, the Debtor’s net sales have significantly decreased while its losses have significantly increased.

The market has spoken: Diesel is, according to the market, simply not “premium.”

And by “market” we also mean wholesalers. The company opted to stop distributing its products to wholesale partners “that were deemed not to fit the premium image.” Now, we can only imagine that included discount retailers. Basically, SOME OF THE RETAILERS WHO HAVE PERFORMED THE BEST OVER THE LAST SEVERAL YEARS. But wait: it gets even worse: the wholesale customers the company DID retain pursued voluminous “chargebacks.” Per the company:

As is common in the retail industry, the Debtor provides certain customers with allowances for markdowns, returns, damages, discounts, and cooperative marketing programs (collectively, the “Chargebacks”). If the Debtor’s customers fail to sell the Debtor’s products, they generally have the right to return the goods at cost or issue Chargebacks, which are netted against the Debtor’s accounts receivable. Due to mounting Chargebacks from wholesale customers, the Debtor was forced to significantly reduce its wholesale activities in recent years.

Basically, nobody is buying this sh*t. Not in stores. Not in wholesale.

And, yet, the company holds premium leases:

The primary means of implementing the 2015 strategy was to reposition the Debtor’s full-price retail and outlet stores to “premium”, high-profile, and high-visibility locations, which was executed by opening certain new stores and relocating others to “premium” locations while closing others deemed not to fit the new strategic positioning model. The result was, despite the losses suffered in connection with the Fifth Avenue store, management’s negotiation and entry into several expensive, long-term leases for certain of the Debtor’s retail locations, such as the Debtor’s “Flagship” store on Madison Avenue, which do not expire by their terms until 2024-2026. Of course, it was then (and remains today) an inopportune time to make long-term commitments to costly retail leases and the significantly increased lease expenses have not been offset by increased sales, which, in fact, have dropped precipitously.

…numerous of the Debtor’s stores are producing heavy losses. The Debtor’s unprofitable stores combined to produce negative EBITDA of approximately $10.7 million in 2018, nearly all of which flowed from full-price retail stores. The Debtor’s profitable stores are not enough to off-set the losses, as the 17 fullprice stores combined to produce negative EBITDA of approximately $8.7 million in 2018.

Now, the company does indicate that certain (seemingly outlet) stores remain profitable, as do the wholesale and e-commerce operations.*** So, there’s that. New management is in place and their plan includes (a) using the BK to negotiate with landlords, shutter some locations, shutter and relocate others, opening new smaller stores and refit existing locations; (b) deploying influencer marketing generally and aiming more efforts towards females (and hoping and praying that athleisure — a term we didn’t see ONCE in the entire first day declaration — doesn’t continue to hold sway and steer people away from jeans, generally);**** (c) growing e-commerce; and (d) revitalizing the wholesale business with key selective wholesale partners. This plan is meant to take hold in the next three years and “will require significant capital investments.” (PETITION Note: cue the chapter 22 preparation). The company intends to effectuate its new business plan via a plan of reorganization pursuant to which it will reject certain executory contracts. All in, the company hopes to be confirmed in roughly 5 weeks. Aggressive! But, like Mattress Firm, trade creditors are “current” and there’s no debt otherwise, so the schedule isn’t entirely out of the realm of possibility.

But this is the part that REALLY gets us. If you’ve been reading PETITION long enough — particularly our “We Have a Feasibility Problem” series — you know by now that you ought to be AWFULLY SKEPTICAL of management team’s rosy projections. Per the company:

The Debtor’s projections indicate that the Reorganization Business Plan will return the Debtor to stand-alone profitability by 2021 assuming successful store closures through this Chapter 11 Case, thereby ensuring its ability to continue operating as a going-concern, saving over 300 jobs, and creating new ones through the new store openings.

Generally, we’ll take the under. Though, we have to say: at least they’re not audaciously projecting a miraculous profit in 2019.

How will they achieve all of these lofty goals? The company’s foreign parent will invest $36mm over the three-year period of the business plan because…well…why the hell not? Everyone loves a Hail Mary.

*The company suffered from an ill-advised and poorly-timed real estate spending spree. Between 2008 and 2015, right as brick-and-mortar really started to decline and e-commerce expand, the company expended $90mm on leases. As for Fifth Avenue, per the company, “the Debtor’s store on Fifth Avenue in Manhattan, which opened in 2008 and closed in 2014, by itself received approximately $18 million in capital expenditures during its tenure while generating substantial losses.
**The company doesn’t appear to have put much into its e-commerce growth. While e-commerce now represents 12% of net sales, sales are only incrementally higher in absolute numbers (from $8mm in 2014 to $12mm in 2018). The wholesale channel, on the other hand, has gone in the opposite direction. Net sales went from $61mm (2014) to $19mm (2018) and now represent only 19% of net sales (down from 32%).
***It seems, though, that outlet stores, wholesale and e-commerce resulted in negative $2mm EBITDA if the math from the above quote is correct. Curious.
****Score for Facebook Inc. ($FB)!

Purdue Pharma Inches Closer to Bankruptcy (Long Opioid-Related BK Activity).

Back in August 2018 in “Opioids (Long Legal Risk),” we wrote:

We’d been watching the news surrounding opioids — particularly that about a wave of lawsuits that have been pouring in — and have wondered: “at what point do the restructuring professionals get put on notice given the litigation risk and attendant liability?” 

We then wrote about how Purdue Pharma looked like a prime candidate for bankruptcy. The manufacturer of Oxycontin is generating more and more press these days.

Earlier this week both Reuters and The Wall Street Journal reported that the pharmaceutical company hired AlixPartners to complement its earlier hire of Davis Polk & Wardwell LLP and is prepping for chapter 11 bankruptcy (PJT Partners is also involved). FA pitches were roughly two weeks ago. The company confronts serious opioid-related liability, besieged all across the country by lawsuits that, for the most part, allege misleading sales practices. This piece — also from earlier this week — notes the company’s tactics in Massachusetts trying to dismiss lawsuits against it.

Why is a bankruptcy becoming more likely? Well, for starters, because restructuring professionals apparently can’t keep their mouths shut. But also, note this passage from a recent New York Times article about the epidemic of opioid-related lawsuits:

The defendants want a global settlement — a comprehensive agreement that will indemnify them against further lawsuits. The multidistrict litigation, with all the federal cases, is positioned for that goal.

But to achieve it, Judge Polster needs cooperation from state courts. There are about 332 other cases that have been filed in state courts. Coordinating data sharing between the state and federal cases is a feat unto itself. Indeed with Purdue documents from the federal litigation, Massachusetts has moved ahead with its own case; over Purdue’s objections, the Massachusetts judge has made public far more than Judge Polster has.

So there’s an ongoing baroque court dance between Judge Polster and the states. He cannot be perceived as a big-footer. The state judges must be seen as independent. And yet Judge Polster needs cooperation from the states to achieve that global settlement.

Seems to us that one court with jurisdiction — say, we don’t know, A BANKRUPTCY COURT! — might be the best way to accomplish this (let alone a channeling injunction of all claims).

But the benefit of bankruptcy may also extend to creditors. Per The Wall Street Journal:

In late 2018, information shared with parties in the multidistrict litigation revealed that Purdue’s assets may not be enough to resolve the company’s potential liability, in part because most of its profits had been regularly transferred to members of the company’s controlling family, the Sacklers, according to people familiar with the matter. Sackler family members still own the company through trusts and for years controlled its board of directors and held senior management positions.

This could be a juicy mandate for both an unsecured creditors committee and a tort plaintiffs committee. Let the bankruptcy dollars flow!!

And not just for Purdue Pharma…


📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.


⚡️Feedback⚡️

Relating to last Wednesday’s segment entitled “We (STILL) Have a Feasibility Problem (Long the “Two-Year Rule”)” about Payless ShoeSource’s unfortunate second rendezvous with bankruptcy, one biglaw associate wrote in:

Your fee listing from Payless look[s] like estate professionals only.  Don’t forget about the litany of RSA parties that got paid their fees including success fees. 

And “Silly Rabbit” (@SillyRa90277261) from the Twittersphere wrote us:

While we DID drop a footnote acknowledging that we were merely providing a snapshot of the extent of fees in that case, both commenters have fair points.


💰New Opportunities💰

Conway MacKenzie is seeking senior-level professionals as part of a significant expansion of their Houston office. 

In addition to Restructuring candidates, they are seeking senior level practice leaders and support staff specializing in Transaction Advisory Services and Litigation Support Services.  Applicants are required to have 10+ years of relevant experience.  Strong preference will be given to those with Big Four and international consulting firm backgrounds.   Relocation packages for those from other markets will be considered.

Qualifying individuals should submit an experience summary to: nklein@conwaymackenzie.com.

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PETITION LLC, in conjunction with the one-year anniversary of our Membership launch, is looking to expand the team. Specifically, we are looking for a Chief Strategy Officer (or other commensurate title) to help take PETITION to the next level. The right candidate must be entrepreneurial, commercial, creative and, frankly, not too “corporate.” She/he must be willing to get her/his hands dirty in all aspects of the company, including, first and foremost, leading new strategic initiatives, but also engaging in sales, research/production, administration, etc. We will look at all candidates but financial advisory, legal, and/or journalism experience is preferred. Current Members will also get first look (logically, Members have a much better sense of what we write about and what we stand for). Email us at petition@petition11.com and write “PETITION CSO” in the subject line.


Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.