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Most Lucrative Energy Job? Some Say CEO of a Bankrupt Company

3 Apr 2017 9:30 am
By Ryan Dezember 

When Ultra Petroleum Corp. emerges from bankruptcy protection in the coming weeks, as expected, the natural gas producer's chief executive is on track to be rewarded with roughly $35 million worth of its stock, more than 10 times his annual compensation in recent years.

Michael Watford, the CEO, and other employees at the Houston company are sharing 7.5% of the Ultra's new shares, a fairly typical cut awarded to managers of companies emerging from bankruptcy protection to incentivize them to stick around. Bankrupt companies usually issue new stock when they emerge from bankruptcy, replacing their old shares.

What's unusual in Ultra's case is the size of the pie from which that slice is coming: The company's postbankruptcy equity value has been set at about $4 billion, meaning that its employees are due some $300 million of stock, 40% of it to be doled out the day its new shares are launched, according to court filings and people familiar with the matter. The rest would be distributed at the discretion of its board.

"In a surprising number of cases, the most lucrative job in the oil-and-gas industry in the last year is a senior executive at a bankrupt company," said Brian Williams, managing director at investment banking and restructuring advisory Carl Marks Advisors.

It is rare for an equity pot that size to exist after bankruptcy. It resulted largely from gas prices roughly doubling from a year ago. Ultra filed for bankruptcy protection in April last year after historically low gas prices pushed its earnings relative to debt below thresholds spelled out in agreements with creditors.

Mr. Watford declined to comment through a spokeswoman. Ultra has said it expects to emerge from bankruptcy by mid-April. In 2015, the latest figures that are available and before the company filed for bankruptcy, Mr. Watford received compensation valued at $3.06 million.

Similar scenarios are playing out among producers of oil, which also is fetching about twice what it did early last year, and at companies that provide drilling and other services to energy producers. Natural gas prices closed at $3.19 per million British thermal units on Friday, twice the price that pushed Ultra into bankruptcy but down about 19% from their year-end highs. U.S. oil prices gained 0.5% to close at $50.60 a barrel.

Jerry Winchester, CEO of Seventy Seven Energy Inc., was awarded 440,000 shares in August, worth about $6.6 million, when the drilling contractor emerged from bankruptcy protection, according to securities filings.

The shares immediately climbed from their initial price of $15, and on Dec. 13 made a huge leap above $40 when rival Patterson-UTI Energy Inc. announced a deal to buy Seventy Seven for $1.76 billion. The deal values Seventy Seven's stock higher than it had ever been before its June bankruptcy filing, and it has made Mr. Winchester's shares worth more than $16 million.

Seventy Seven representatives didn't respond to requests for comment.

As for Ultra, some of the shares due to be distributed to executives are subject to vesting schedules, and the numbers may change subject to pending litigation. The values also might swing dramatically higher or lower depending on how the company's stock trades.

The situation shows how timing and the ability to hang on can be everything in the oil industry. Investors in companies that sought bankruptcy protection last year when energy prices were at their lowest levels caught the rebound and have generally fared better, compared with those invested in companies that succumbed to the oil bust early on and grappled with prices that kept plunging even after they had filed.

More than 250 energy U.S. and Canadian oil-and-gas companies have filed for bankruptcy protection since 2014, when a global glut of crude caused energy prices to collapse. Those companies, which include oil and gas producers, pipeline operators and oil-field service providers, collectively reported about $118 billion of debt, according to law firm Haynes and Boone LLP.

Executives aren't the only ones benefiting. Creditors of bankrupt energy companies are doing much better than they were a year ago.

While many of last year's bankruptcy filers have yet to emerge from bankruptcy protection, the average recovery rate for debtholders in eight that have is about 41%, up from the 21% of value they recovered in 2015's bankruptcies, according to Moody's Investors Service. Historically the average recovery in energy producer bankruptcies is about 59%, according to Moody's, which tracks only large cases.

"You can see a trend of recoveries improving," said Julia Chursin, a Moody's analyst. "They're not as catastrophic as 2015."

Ultra's emergence will push the recovery rate higher. Its debtholders are being completely repaid, some with cash and others with stock, according to court filings.

Even then there is enough equity left over in Ultra, which drills in Wyoming and Utah, to give the company's existing shareholders about 41% of its new stock -- a rarity in corporate bankruptcies, which usually wipe out shareholders.

For the CEO, Mr. Watford, that is also good news. He owns roughly 2.5% of Ultra's soon-to-be canceled stock, a large amount for a nonfounding executive. Under the company's bankruptcy plan, which was approved earlier this month, he is due about 2 million, or 1%, of its new shares to replace those being canceled, in addition to those he is awarded under the company's management incentive plan.

Write to Ryan Dezember at ryan.dezember@wsj.com

(END) Dow Jones Newswires

April 03, 2017 05:30 ET (09:30 GMT)

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