In the past few years, more than a few energy companies have filed for Chapter 11. But an unsettling number of those restructurings have involved hefty payouts to the managements that led to their failure.
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In this Industry Focus clip, Motley Fool energy analysts Sean O'Reilly and Taylor Muckerman look at what's going on with this trend, some of the worst offenders in the past few years, and what it means for the companies involved.
A full transcript follows the video.
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This video was recorded on April 27, 2017.
Sean O'Reilly: More than a few oil and gas companies, producers, have gone belly up in the last couple years.
Taylor Muckerman:Theywent through some restructuring. They emerged.
O'Reilly:It'snot quite belly up, because there's a difference between Chapter 7bankruptcy, which is liquidation, and Chapter 11, which is restructuring,getting rid of some debt,converting it to equity, that kind of thing.
Muckerman:Selling some assets, yeah.
O'Reilly:Which,of course begs the question, what happens to the executives? Itsounds like some good stuff.
Muckerman:Good stuff for whom?
Muckerman:For them, there's a lot of good news. TheHouston Chroniclerecently put out an article showing that 10 companies with promises to management of between 5% and 10% of new equity rewards go ahead and reserve --
O'Reilly:Of the company.
Muckerman:Yeah,of the new restructuredequity structure; 5% to 10% of those outstanding shares are just reserved for management.
O'Reilly:Why are the debtholders, the bondholders, OK with this?I mean, I know they don't want to run an oil company, but still.
Muckerman:Alot of people were saying, "Hey, these guys wereable to build this company to begin with; we don't want them to be offeredmore money from somewhere else and jump ship, and then have to emerge ... "
O'Reilly:Buttheir company went under, Taylor.
Muckerman:I know! I know. And theyhave to emerge from restructuring with a CEO thatmight not know as much about the company. Ipersonally as a shareholder would not be too pleased.I mean, I'm fine with the same CEO being there.
O'Reilly:Well,if you're an original shareholder, you're gone, sorry.
Muckerman:I'm fine with the CEO remaining, but not with increased share structure. And it's just a bad incentive structure, whenthey can make even more money than they're being given.Floyd Wilson -- $24.1 million in annual comp coming out of [Halcon Resources'] bankruptcy restructuring. Up from anaverage of the previous few years of $3.4 million. So almost 8x.
O'Reilly:It'sgood to be the king.
Muckerman:Now, within that $24.1 million, it could be higher or lower in value, because some of it is options-based, some of it is restricted shares-based, so they divest over time. But the simple fact that thepredominant amount of this compensation is share-based, you might have a situation where some of these CEOs just try to roll out as quickly as possible andget themselves into the same situation that led them to bankruptcy when the oil markets sold off.Linn Energy,one of your favorite oil companies of yesteryear, their CEO, Mark Ellis,received $16 million inrestricted shares post-bankruptcy. That company actually set aside 7% of shares to reward management, which, at the time of the reservation, were worth $173 million. This is a company that was one ofthe biggest bankruptcies in the entire energy world overthe last couple years,setting aside 7% of their shares formanagement rewards.
Muckerman:Yeah,no words. AndGoodrich Petroleum,Basic Energy, among the other two that were part of that 10 that theyidentified. To me, hooray for them, but the incentivization is all wrong,coming out of bankruptcy, giving them vested shares, options.
O'Reilly:I wonder what happened in the last big downdraft in the '90s in the oil sector,if something like this had happened.
Muckerman:Yeah,I don't know if there was a paper out there about that.
O'Reilly:Oh, well. Bottom line --don't worry, the executives are just fine.
Muckerman:Yeah,they're doing all right. But ifmaybe you wanted to investin a company that has just restructuredthinking there might be an opportunity for some significant upside, bear in mind that --
O'Reilly:Seven percent of it is going to ...[laughs]
Muckerman:They could beincentivized for rapid growth and long-term potentialdestruction,depending on thecyclicality of the industry.
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.