Struggling debt funds turn to activist to save U.S. energy bets



NEW YORK (Reuters) – Struggling debt investors in U.S. oil and gas companies are turning into activist shareholders and pushing for more deals in the sector to increase the value of the energy holdings they have acquired during the oil market crisis.

Hedge funds, such as Fir Tree Partners and Strategic Value Partners, bought the debt of many U.S. energy companies for pennies on the dollar as oil fell more than 70% in late 2014 and 2015 and fell. then exchanged for shares in bankruptcy proceedings.

But rather than cash in by selling the shares once the relaunched companies returned to the stock market as they typically would, the funds held onto their stakes as the lukewarm rally in crude prices held back valuations at energy companies.

Now that oil prices are at their highest since July 2015, hedge funds are seizing the opportunity and trying to convince companies to sell assets or consider mergers to get more value from their investments.

For example, Ultra Petroleum Corp UPL.O and Midstates Petroleum MPO.N said they would pursue deals this year due to pressure from troubled debt funds.

During 2015 and 2016, 96 U.S. oil and gas companies filed for bankruptcy, according to law firm Haynes and Boone. At least 12 of them were re-listed with troubled debt hedge funds as shareholders, according to a Reuters review of bankruptcy court records and shareholder data. (Graphic:tmsnrt.rs/2zbKieM)

With its shares down 45% since its IPO in April, Ultra Petroleum, for example, said in September that it would explore ways to increase the value of its shares with Fir Tree, including bringing in a investment bank to sell assets.

CALL TO ACTION

Fir Tree also joined Q Investments in September to call Jones Energy JONE.N to change course, including the possible sale of the company. Jones survived the worst of the oil crisis, but his shares are down about 70% this year.

“When the stock price goes above $ 1, it shows you need to act fast,” said Scott McCarty, partner at Q Investments.

Fir Tree, which manages around $ 9.4 billion, is the most consistent presence in these revamped energy companies.

David Proman, his co-head of restructuring, said the fund was pushing companies into deals because the stock market was not valuing its holdings at fair prices.

He noted that in several cases the shares of the reorganized company were trading at levels that valued it below what bond prices indicated before and during the bankruptcy.

With many companies, the funds want them to focus on key basins in order to reduce widely distributed equipment and personnel costs. The funds hope that the oil and gas derivative fields will attract the interest of oil majors and large independents, which must replenish their reserves after the crisis, or other operators focused on this particular geography.

With shareholder meetings scheduled for early 2018, calls to action from management boards could intensify before the end of this year.

“There are a number of poorly managed oil and gas companies and many potential activist targets trading well below their peers,” said Kai Haakon Liekefett, team leader at the law firm Vinson & Elkins who advises boards of directors on how to deal with activist shareholders.

Such campaigns could help secure more deals in the US oil and gas sector after the downturn in activity this year, as most companies have avoided important and transformative deals due to the uncertain outlook for oil prices. Just under $ 114 billion in mergers and acquisitions were announced on Oct. 25, down 7.4% from a year ago, according to Thomson Reuters data.

LACK OF EXPERIENCE

Drawing inspiration from the book of activist investors, hedge funds seek representation on boards of directors, as Strategic Value Partners did on September 13 with Penn Virginia Corp. PVAC.O.

Such demands mark a further departure from the funds’ short-term investment approach, as funds must agree not to sell shares in the open market as long as their representatives sit on the board of directors.

Admittedly, calls for board seats and other actions can meet resistance, and struggling debt funds often lack the experience to fight over corporate strategy and solicit other shareholders. .

Recruiters say some funds have started looking for veterans of shareholder activism to bring this expertise.

For example, DE Shaw & Co, a $ 40 billion hedge fund, hired Quentin Koffey in June from Elliott Management Corp, one of the world’s largest activist hedge funds.

“If (the funds) don’t have the skills, maybe they will seek to partner with someone who does, or they will seek to learn it through bankers and lawyers and by doing appealing to the right people, ”said Ele Klein, co-chair. of the global shareholder activism group of the law firm Schulte Roth & Zabel LLP.

For a chart on US energy stocks and the recovery in oil prices, click: here

Reporting by David French and Jessica DiNapoli in New York; Editing by Greg Roumeliotis



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