Harbour / EIG continues pursuing Pacific Exploration & Production, Reduces Tender Offer For Debt To 16% Of Face Value

While initially offering $175 per $1,000 face value of delinquent Pacific Exploration & Production (TSX: PRE) (BVC: PREC) notes due between 2019 and 2015, Harbour Energy subsidiary EIG Pacific Holdings has revised downward its offer to $160 per $1,000 face value, and amended other important terms of its tender offer. The offer is revised with conditions that Pacific Exploration file for bankruptcy, and that the tender offer include a 90 day “Long Stop” date.

“Our goal remains to keep Pacific Exploration & Production intact and avoid the death spiral the company appears to be facing. It seems apparent that Pacific Exploration and Production is insolvent and that a bankruptcy filing is imminent. The company and its creditors have not generated a credible alternative to our offer and now appear to face a prolonged and volatile bankruptcy that will require an immediate and significant infusion of capital in order for the company to meet its basic operating obligations. No credible source for these funds has been identified and rumors of a significant liquidity hole continue to grow,” said EIG Global Energy Partners’ CEO and Harbour Energy’s co-chairman R. Blair Thomas (pictured above).

According to Fitch Ratings, which has downgraded Pacific Exploration & Production’s credit rating, depressed oil prices have reduced Pacific’s liquidity to an adequate $489 million in cash with zero short-term debt. But as of the 12 months ended September 2015, total and net debt/EBITDA have increased to 4.3x and 3.9x, from 1.9x and 1.8x in 2014, with total debt increased by $630 million during the first nine months of 2015.”

“The time for posturing and delay is over—Pacific E&P’s management and its Board of Directors owe it to all stakeholders to engage in a constructive dialogue with EIG regarding our proposal, which restores the financial health of the company by massively deleveraging its balance sheet. We appreciate the input we’ve received from the advisors to the Ad Hoc Committee of bondholders and have adjusted our offers to enhance certainty, offer liquidity to tendering bondholders and significantly shorten the timeframe in which remaining conditions must be satisfied,” continued Thomas.

“Pacific’s ‘C’ rating points towards strong potential of default with recovery expected to be close to 50% with an oil prices assumption of $40 per barrel,” said Lucas Aristizabal, Fitch Ratings’ Senior Director. Fitch uses a going concern analysis, which yields a higher recovery value than a liquidation scenario, which could yield investors recovery between 31% and 40%.

Pacific Exploration & Production is currently within a 30 day grace period, after missing roughly $65 million in interest payments that were due January 19, and obtained waivers from lenders  that provide relief from the covenant that requires Pacific Exploration & Production’s consolidated net worth to be above $1 billion USD and the company to maintain a consolidated leverage ratio of 4:50:1:00, reflecting the permitted gross debt-to-trailing twelve month adjusted EBITDA. The syndicate of lenders include Bank of America as the administrative agent, a $250 million credit and guaranty agreement with HSBC Bank as agent, a.$109 million credit and guaranty agreement with Bank of America as lender, and a $75 million master credit agreement with Banco Latino Americano de Comercio Exterior (Bladex)

Pacific Exploration & Production is involved in exploration and production of natural gas and crude oil, with operations focused in Latin America. The company has a portfolio of assets with interests in more than 85 exploration and production blocks in seven countries including Colombia, Peru, Guatemala, Brasil, Guyana, Papua New Guinea, Mexico and Belize.

Harbour Energy is an energy investment vehicle formed by EIG Global Energy Partners and the Noble Group (SGX:N21) to pursue control and near-control investments in high-quality upstream and midstream energy assets globally. Harbour Energy is externally managed by EIG Global Energy Partners, not to be confused with its own subsidiary, EIG Pacific Holdings, Ltd. EIG Global Energy Partners specializes in private investments in energy and energy-related infrastructure on a global basis and had $14.3 billion under management as of September 30, 2015.

The Venezuelan that complicated Harbour’s Friendly Takeover

Pacific Exploration & Production, then known as Pacific Rubiales had agreed to sell itself to Harbour Energy and Mexico based Alfa group in May of last year. The move was resisted and eventually derailed by The O’Hara Administration, a group of shareholders controlled by Venezuela’s Alejandro Betancourt. Betancourt heads Derwick Associates, an energy company that has worked extensively with the Chavista government of Venezuela in recent years. In May, the O’Hara Administration, backed in part by Spanish billionaire Alberto Cortina and Argentina based Adar Macro Fund acquired just under 20% of Pacific Rubiales, and Alejandro Betancourt won a seat on Pacific’s board of directors. As a Toronto based company with shareholders’ rights provisions, should a shareholder acquire 20% of shares, the shareholder generally must present a tender offer for the entire company.

Finance Colombia has reached out to Alejandro Betancourt for comment but as of press time has not received a response.

“Our long term view is that Pacific needs to enter new markets to grow,” Betancourt told Bloomberg Business. Betancourt has said on his own personal website that “growth for the Colombia-based company hinges on its ability to tap new resources and markets in Mexico and Venezuela,” perhaps giving insight into his interest in Pacific Exploration and production. International oil exploration and production companies have shunned Venezuela since its radical socialist government declared a “revolución” patterned after communist Cuba. Venezuela is now in a prolonged economic crisis, with the highest inflation in the world, and the highest crime rate in the world, in its capital of Caracas.

This may all become academic, with Harbour’s subsidiary buying outstanding debt that is already in arrears, and facing the prospect of default. Should Pacific Exploration & Production be declared insolvent, bankruptcy would put creditors–like Harbour’s EIG Pacific Holdings, ahead of stockholders in any reorganization or liquidation.

Harbour strikes back

Since O’Hara’s move in May to thwart Alfa and Harbour Energy’s takeover bid, oil prices have continued to fall, Iran had pumping restrictions lifted, China’s stockmarket has plunged, and signs of a global deceleration are becoming more evident. Pacific Exploration & Production has missed debt payments and is on the brink of default. Harbour has reappeared with its offer, and now is taking a more aggressive stance.

“Since we made our initial offers, oil prices have dropped further and nearly a full month has been wasted without a solution for the company, bringing Pacific E&P closer to the brink and sharply increasing the risk profile of this transaction. We must therefore reduce our offer price to account for a less conditional offer, the continuing decline in oil prices and a further eroded Pacific E&P balance sheet. The bondholders who have tendered notes to date will benefit from the reduced conditionality of our revised offers, as well as the higher price from our initial offers,” continued Thomas, in a statement. “We urge all remaining bondholders to tender their notes today. In a highly complex and uncertain situation, our revised offers provide price certainty to noteholders and, for all of the company’s stakeholders, including host countries, the best path towards assuring continuity of operations and restoring the value of Pacific E&P.”

Pacific Exploration & Production is being advised by Lazard Frères & Co., Norton Rose Fulbright Canada,Proskauer Rose,  Zolfo Cooper, and Garrigues. The independent creditor’s committee is being advised by Osler, Hoskin & Harcourt. An Ad Hoc committee representing bondholders has retained Canadian law firm Goodmans LLP to represent them regarding the missed bond payment, and also consider Harbour/EIG’s tender offer, says Goodman in a statement. The Ad Hoc Committee holds in the aggregate approximately 40% of the approximately US$4.1 billion principal outstanding amount of the notes.

EIG’s Revised Tender Offer Terms & Conditions for Pacific Exploration Bondholders

The Tender Offers are now scheduled to expire at 5:00 p.m., New York City time, on March 24, 2016 (unless extended or earlier terminated with respect to a Tender Offer, the “Expiration Date”). The Tender Offers are being made pursuant to an Offer to Purchase dated, January 13, 2016, as amended January 19, 2016 (the “Original Offer to Purchase”) , and the Letter of Transmittal (the “Letter of Transmittal”) and are being supplemented by a Supplement No. 1 dated February 10, 2016 (the “Supplement” and, together with the Original Offer to Purchase and Letter of Transmittal, as each may be further amended or supplemented from time to time, the “Tender Offer Materials”), which set forth a more detailed description of the Tender Offers.  Holders of the Notes are urged to carefully read the Tender Offer Materials before making any decision with respect to the Tender Offers.  Information contained in the Original Offer to Purchase and not addressed in the Supplement remains unchanged.

The following table sets forth certain terms of the Tender Offers for Holders that tender Notes on or after the issuance of the Supplement:

Amouts above are US Dollars

(1)       From the Issuer’s publicly filed interim financial statements for the three months ended September 30, 2015, available on SEDAR.

(2)       Per U.S. $1,000 principal amount of Notes.  Excludes accrued and unpaid interest.

(3)       Holders of Notes validly tendered and not validly withdrawn prior to the issuance of the Supplement will continue to be entitled to receive the applicable consideration as set forth in the Original Offer to Purchase.  This includes the accrued and unpaid interest on those Notes from, and including, the last interest payment date with respect to those Notes to, but not including, the earliest of (i) the applicable Settlement Date, (ii) the date on which Issuer Reorganization Proceedings are commenced or (iii) February 29, 2016, as applicable (“Accrued Interest”). Under no circumstances will the Offeror pay Accrued Interest on Notes tendered on or after the issuance of the Supplement.

(4)       Includes the Early Tender Payment (as defined below) for Notes validly tendered and not validly withdrawn, prior to the Early Tender Date and accepted for purchase.

The Supplement also amends the Tender Offers to provide as follows:

• the reorganization condition as further described in the Tender Offer Materials is replaced with the conditions that (i) the Issuer has (a) instituted proceedings, (b) consented to the institution of proceedings against it or (c) filed a petition, consent or notice seeking a reorganization or arrangement of its debt, under the CCAA or other insolvency proceedings, (ii) the Company’s bank lenders have agreed to certain financing arrangements, and (iii) the Offeror has been given reasonable access to information by the Company, in each case, as further described in the Supplement;
• the participation condition as further described in the Tender Offer Materials is reduced to 66.67% and no longer requires valid tenders of at least 80% aggregate outstanding principal amount of the Notes and the Power of Attorney Condition is reduced to 66.67% and no longer requires valid Powers of Attorney with respect to at least 80% aggregate outstanding principal amount of the Notes;
• Holders who have validly tendered Notes will have the ability to withdraw and sell or otherwise transfer their Notes after the Withdrawal Deadline subject to certain conditions;
• on or before May 10, 2016, the Offeror will either (i) purchase all Notes validly tendered and not validly withdrawn or (ii) provide Holders with a right to withdraw their tendered Notes for two business days;
• the Offeror reserves the right to accept for purchase at any time prior to the applicable Expiration Date all Notes which have been previously validly tendered and not validly withdrawn pursuant to any Tender Offer;
• the applicable Early Tender Date shall be February 24, 2016 for Holders who did not tender Notes prior to the date hereof and the applicable Expiration Date shall be March 24, 2016; and
• certain other amendments as described in the Supplement.

As of 4:00 p.m. (New York City Time) on the date hereof, $98,330,000, or 7.56%, of the outstanding aggregate principal amount of the 2019 Notes, $21,759,000, or 3.15%, of the outstanding aggregate principal amount of the 2021 Notes, $71,406,000, or 7.14%, of the outstanding aggregate principal amount of the 2023 Notes and $37,726,000, or 3.39%, of the outstanding aggregate principal amount of the 2025 Notes have been tendered to the respective Tender Offers.  Based on the foregoing, together with the Notes acquired by Harbour Energy prior to the tender offer, EIG now owns or would control in a restructuring process a Note position among the largest of any other Noteholders in the Company.

The Offeror has retained Citigroup Global Markets Inc. as an exclusive Financial Advisor in this transaction and to serve as sole Dealer Manager for the Tender Offers.  MacKenzie Partners, Inc. has been retained to serve as the Information and Tender Agent for the Tender Offers.  Questions regarding the Tender Offers may be directed to Citigroup Global Markets Inc. at 390 Greenwich Street, 1st Floor, New York, New York 10013, Attn: Liability Management Group, (800) 558-3745 (toll-free), (212) 723-6106 (collect). Requests for the Tender Offer Materials may be directed to MacKenzie Partners at (800) 322-2885 (toll-free), (212) 929-5500 (collect) or via email at [email protected].

Cover & Headline photo courtesy of EIG Partners