Apollo and Elliott Team Up to Save EP Energy Stake in Bankruptcy

(Bloomberg) -- Apollo Global Management Inc. and Elliott Management Corp. put forward a bankruptcy plan that would see Apollo hold onto its stake in EP Energy Corp. while cutting nearly two-thirds of its $4.9 billion debt load.

The restructuring plan, which was presented in front of Judge Marvin Isgur in Houston on Friday, would see Apollo and Elliott convert their roughly 70% stake in the company’s 1.5-lien notes into 99% of the equity in the reorganized oil and gas company. Those lenders, along with other 1.5-lien holders, would also backstop $325 million of its $436 million equity rights offering at a discount.

The agreement would allow Apollo to hang onto its ownership of EP Energy, which it created in 2012 through a spin-out from El Paso Corp., amid low commodity prices that pushed the Houston-based company to file for Chapter 11. An ad-hoc group of the company’s unsecured bondholders intends to object to the plan, which would hand them 1% of the new equity, calling it “patently unfair” Frank Merola, of Stroock & Stroock, counsel for the ad hoc unsecured bondholder group, said in the hearing.

“We do think this is the best transaction for the company,” Jeffrey Saferstein of Paul Weiss Rifkind Wharton & Garrison LLP, counsel for Apollo, said in the courtroom.

EP Energy Corp. joins more than two dozen oil producers that have gone bust this year in the energy sector’s renewed slump. The company’s Chapter 11 filing in Houston listed $4.98 billion in liabilities and $4.19 billion in assets, making it the largest oil and gas producer bankruptcy since 2016.

The deal, which would lower debt costs by as much as $263 million annually. It’s supported by holders of nearly 30% of the company’s 1.25-lien notes, of which Apollo and Elliott own about 25%, and about 70% of its 1.5-lien notes support the plan, according to court filings. Avenue Capital Management and Access Industries, an Apollo subsidiary, also support the plan, counsel for EP Energy said in court Friday.

Judge Isgur gave interim approval on a series of administrative first-day motions that would enable it to continue operating in bankruptcy, including motions to continue paying wages and employee benefits, and using its cash management system.

Losses Mount

The proposed bankruptcy deal contemplates rolling 50% of its existing revolving base loan into a bankruptcy loan, which would then convert into a $629 million loan upon exit from bankruptcy, according to a declaration by David Rush, the company’s chief restructuring officer. Current holders of EP’s voting stock may receive a slice of a $500,000 payout under the proposed plan. Apollo owns about 39% of EP equity, with certain subsidiaries owning an additional 38%.

EP Energy’s existing 1.125-lien lenders would see their debt reinstated at current terms, or other terms agreed to by EP, Apollo and Elliott, according to the filing. Part of the 1.25-lien debt would be converted to equity, with $350 million to $362 million of that debt reinstated. EP would have about $1.5 billion of debt upon exit from bankruptcy.

The restructuring plan also includes the possibility of Apollo and Access Industries giving EP their equity interest in Wolfcamp Drillco Operating LP, owned and controlled by Apollo, which has certain oil and gas assets in Texas.

“Our business operations are expected to continue without interruption throughout this process,” Chief Executive Officer Russell Parker said Friday in a statement. “The EP Energy Board and management team are confident in the strength of our assets and future of our business, and we would like to thank all our employees for their continued dedication.”

EP Energy hasn’t posted an annual profit since 2014, when oil prices began a two-year slide from more than $100 a barrel to less than $30. While hundreds of energy companies went bankrupt, the survivors got some relief in 2018 and again this year when prices topped $60. EP Energy needed a price closer to $70 per barrel, but it had already hedged its 2019 production at about $66.41, Spencer Cutter, an analyst with Bloomberg Intelligence, calculated.

Vying Creditors

The Houston-based company warned in regulatory filings that it might not be able to keep operating past May 2020 when a large portion of its $4.5 billion debt load was due to be repaid.

In the run-up to bankruptcy, the Elliott and Apollo group of creditors was vying with another group to take control of the struggling oil and gas driller through a debt restructuring deal. The other group of senior bondholders included Fidelity Investments, Pacific Investment Management Co. and JPMorgan Asset Management, Bloomberg News previously reported.

EP Energy is being advised by Weil Gotshal & Manges LLP, Evercore Inc. and FTI Consulting Inc., according to a statement. The company’s second-day hearing is scheduled for Nov. 7 at 1:30 p.m. Houston time.

The case is EP Energy Corporation et al, 19-35654, U.S. Bankruptcy Court for the Southern District of Texas (Houston).

--With assistance from Christopher DeReza, Jeremy Hill and Rick Green.

To contact the reporter on this story: Allison McNeely in New York at amcneely@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Dawn McCarty, Nicole Bullock

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