Distressed debt funds turn activist to rescue U.S. energy bets

NEW YORK (Reuters) - Distressed debt investors in U.S. oil and gas companies are turning into activist shareholders and pushing for more deals in the sector to boost the value of energy holdings they snapped up during the oil market slump.

Hedge funds, such as Fir Tree Partners and Strategic Value Partners, bought debt of many U.S. energy firms for pennies on the dollar as oil tumbled more than 70 percent in late 2014 and 2015 and later swapped it for shares in bankruptcy proceedings.

But rather than cash out by selling the shares once the revived companies returned to the stock market as they would typically do, the funds kept their stakes because tepid crude price recovery has held down energy firms’ valuations.

Now with oil prices at their highest since July 2015, hedge funds are seizing the moment and trying to convince companies to sell assets or consider tie-ups to squeeze more value from their investments.

For example, Ultra Petroleum Corp UPL.O and Midstates Petroleum MPO.N said they would pursue deals this year as a result of pressure from distressed debt funds.

Over the course of 2015 and 2016, 96 U.S. oil and gas companies filed for bankruptcy, according to law firm Haynes and Boone. At least 12 re-listed on the stock market with distressed debt hedge funds as their shareholders, according to a Reuters review of bankruptcy court filings and shareholder data. (

With its shares down as much as 45 percent since its initial public offering in April, Ultra Petroleum, for example, said in September it would explore ways to boost its stock value together with Fir Tree, including hiring an investment bank to sell assets.


Fir Tree also joined Q Investments in September in calling for Jones Energy JONE.N to change course, including the possible sale of the company. Jones survived the worst of the oil slump, but its shares are down around 70 percent this year.

“When the share price breaks $1, it shows you need to act quickly,” said Scott McCarty, partner at Q Investments.

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

David Proman, its co-head of restructuring, said the fund was pushing firms to pursue deals because the stock market did not value its holdings at fair prices.

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

With many firms, funds want them to focus on key basins to reduce costs of having equipment and staff spread widely. Funds are hoping the spun-off oil and gas patches will attract interest from oil majors and large independents, which need to replenish reserves after the slump, or other operators focused on that particular geography.

With shareholder meetings due early in 2018, calls for management boards to take action may intensify before the end of this year.

“There are a number of mismanaged oil and gas companies and a lot of potential activism targets trading well below their peers,” said Kai Haakon Liekefett, head of law firm Vinson & Elkins’ team that advises boards on dealing with activist shareholders.

Such campaigns could help bring about more deals in the U.S. oil and gas sector after activity slowed this year because most companies shunned large, transformative deals due to uncertain oil price outlook. Just under $114 billion of mergers and acquisitions had been announced by Oct. 25, down 7.4 percent from a year ago, according to Thomson Reuters data.


Taking a leaf out of activist investors' book, hedge funds are calling for representation on boards of directors, as Strategic Value Partners did on Sept. 13 with Penn Virginia Corp PVAC.O.

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

To be sure, calls for board seats and other actions can face resistance and distressed debt funds often lack experience in battling over corporate strategy and canvassing other shareholders.

Recruiters say some funds have started looking for shareholder activism veterans to bring in that expertise.

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

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

For graphic on U.S. energy stocks and oil price recovery, click: here

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