Offshore and services companies in the oil and gas industry have been hit the hardest during the current price crisis, priming the pump for companies like Cal Dive International Inc., which is both offshore and services-driven, to flood the bankruptcy courts.
And the flow isn’t expected to stop any time soon.
Rigzone talked to investment bankers Joe D’Angelo and Charles Boguslaski, both of whom guided Cal Dive through the bankruptcy process in their work at Carl Marks Advisors. Finding financial support to weather the market was tough a year ago when Cal Dive originally petitioned the court for Chapter 11 protection. The deal Cal Dive ultimately struck for its vessels and equipment would be even more difficult today, and companies that are on the brink of financial disaster today have even less chance for survival.
Rigzone: Cal Dive had the double whammy of being focused in two of the hardest-hit sectors of the energy industry. What was it like to negotiate their deal while oil prices were continuing to fall?
D’Angelo: The first thing we did was level-set the expectations of secured lenders because they had appraisals that were under the impression that the vessels were worth more than $160 million.
We went to the lenders and said, ‘We hope you don’t think that’s what these vessels are worth. There is a supply glut of comparable vessels right now that are idle. More than half of our vessels are out of class, and it would cost millions of dollars to bring them in class – a buyer’s not going to pay for that. Vessels only have value worth more than scrap if they are associated with a contract where they are currently billing and collecting revenue.’
It was important to set their expectations because they thought they could get out of the hole, [but] the vessels were not worth their debt.
Rigzone: What characterizes success in a bankruptcy of such proportions?
D’Angelo: We had two key successes in a very bad scenario: We were able to keep the Australian operations intact and preserve it as a going concern. We also finished the work in the Gulf of Mexico for Pemex [Petróleos Mexicanos], and were able to preserve that as a going concern. [Boguslaski] successfully auctioned both of those operations to strategic buyers, and he also auctioned the 17 vessels in a very, very tight time frame among a bunch of distress buyers and scrap dealers.
Rigzone: Would you be able to put that deal together today?
Boguslaski: It would’ve been more challenging. One of our strategic thrusts was to move faster rather than slower to deal quickly in a market that was deteriorating. You see a larger glut of vessels on the market today, and offshore projects are continuing to be canceled. The market has gotten worse.
Rigzone: Are you finding other companies are in a similar position to that of Cal Dive – over-levered in a troubled market?
D’Angelo: I think it is safe to say that when oil was rising and at or above $100, there were a lot of lenders and funds interested in putting money out, and there were a lot of operators interested in taking it. They’re certainly over-levered now with the drop in revenue and EBITDA [earnings before interest, taxes, dividends and amortization].
Rigzone: What is private equity’s role in this environment?
D’Angelo: Some people – like the private equity funds and hedge funds – are thinking we’re seeing the inflection point … it’s time for them to get in and buy assets. I think lenders are going to be under a lot of pressure. There will be beneficiaries in this market – companies that have been run very, very well and have not over-levered – and they’re likely to be beneficiaries scooping up assets. We might come out of this seeing that one-third of the participants have consolidated.
Rigzone: So have we reached the point where the buyer’s market – long predicted – has emerged?
D’Angelo: I don’t think it’s now. It doesn’t feel like we’re at the inflection point. The world is falling apart again today – the oil price [recently dropped to $26-something]. I think we need to see what happens in the spring redetermination before you can say it’s the inflection point.
Rigzone: Does the hiring of a financial advisor necessarily mean a company is going to file for bankruptcy?
D’Angelo: Typically, the mindset of a company is they’re not going to use their precious liquidity to pay for outside people unless they’re forced to, so unfortunately, sometimes it takes a bank default for that to happen. In this environment, we tell our service clients [to] do everything we can to stay out of bankruptcy. It’s very expensive: you lose customers, you lose employees and the professional cost is higher. So unless you have some specific strategy, maybe related to rejecting contracts, you should avoid bankruptcy. If there’s a transaction that could be negotiated out of bankruptcy, and then you [can] use the bankruptcy to facilitate the transaction because a lot of investors want the deal to be flushed through a bankruptcy.
We’ve seen a lot of the E&Ps [exploration and production companies] filing – about 39 since the beginning of March and almost 50 service companies – for bankruptcy. A lot of those bankruptcies were to facilitate debt conversions, and now, they’re struggling with how to come out of bankruptcy. [A company] needs a bottoms-up operating plan that all the stakeholders can negotiate from and secure exit financing and enough liquidity to get out of bankruptcy.
Rigzone: What’s the best chance for companies in this environment to avoid bankruptcy?
D’Angelo: Things are so bad right now, you had to have addressed that before. When oil was at $100, money was spent all over the place. Those who didn’t continue to act with discipline, it’s a little too late to make up for it now. If you took on all that debt and you expanded into different basins, and you bought $1 billion worth of land leases, you’re going to have to rationalize your business and you’re not going to be able to keep all you’d like to keep. You need to have potentially three plans: What would you do if oil were to come back? What would you do if it stayed where it is? What would you do if it declined further? But if you’re guilty of that irrational exuberance of overextension, the market isn’t availing opportunities to just fix it in the normal course.
If there’s any basis for the company to get through it, and the lenders and other stakeholders can get comfortable with the support they’d have to provide to get through it, you really don’t want to be liquidating in this environment. Recoveries are going to be horrible. Cal Dive was an example of it.
In some situations, you’re not going to be able to find that support. There’s a lot of fatigue and the lenders and investors are not going to be able to support all of the participants. And another reason companies choose to file is just to control the situation and get the benefit of the protection of an automatic stay of bankruptcy.
Rigzone: What does a volatile market do for your business?
D’Angelo: We benefit from others misfortune – that’s our business. We do corporate restructurings. We don’t need for things to get much worse for us to thrive, and it’s going to be really hard to get some transactions done if we don’t see some recovery in oil prices. Yes, it’s good that there’s more business; we’re busier and we have higher utilization. It’s probably going to be here for a while. But when it’s this bad, it’s hard to get good outcomes.
Boguslaski: A good part of my business is regular [mergers and acquisitions]-related, capital market transactions, which is certainly suffering now. You need there to be a broad base of support level for trades or sales to happen in the marketplace. You would like to see more activity from buyers that have a core belief in the future projections of the company and the outlook for the environment.
D’Angelo: In the first quarter of 2015, we saw billions of dollars of second lien investments because those investors thought we would have a V-shaped recovery. And by summertime, they didn’t see that happen and the market seized up. You don’t see those second-lien investments now; you see filings to convert debt to equity or to convert it into less-secured. It’s not a V-shaped recovery. And so nobody has a crystal ball on what the recovery is going to be and so no one wants to invest when they think it’s still a falling knife. Some are going to be right. Some are going to be wrong.
Rigzone: How might the sector look once it does recover?
Boguslaski: That’s the difficult piece. [At one time] people thought $65 per barrel, whereas coming into 2016, that largely shifted down and starting to see estimates longer term as low as $45 into the $50s. The recovery outlook is long and it’s one where it might start to plateau off again at a much lower level than $100 per barrel.