Anatomy of a Deal | The rescue and sale of ATP Oil & Gas UK
6 June 2014 | By Becky Waller-Davies
20 January 2014
20 January 2014
10 April 2014
6 December 2013
27 January 2014
The sale of North Sea energy company ATP Oil & Gas UK landed on the desks of Mayer Brown’s London restructuring team in August 2012, after colleagues in the US were instructed on the bankruptcy of its US parent company ATP Oil & Gas Corporation.
ATP Corporation had run into trouble thanks to falling production resulting from the moratorium on drilling imposed in the Gulf of Mexico following the Deepwater Horizon oil spill and a looming $89m tax bill.
ATP UK was heavily reliant on funding from its parent so that when ATP Corporation entered bankruptcy its British subsidiary was left with no means of satisfying its liabilities, which amounted to over one billion dollars.
In addition, the process in the US had resulted in the resignation of the US-based incumbent directors of ATP UK, who were replaced by the UK based drilling and operations manager, who agreed to become managing director for the purposes of guiding the company through the sale.
The deal itself, and the mechanism used to sell the shares in the company, were highly unusual in the industry, as was the very fact that it ran into trouble: the energy industry is lucrative and companies within it tend to fare well even in times of recession.
As US colleagues guided the insolvent ATP Corporation through Chapter 11 bankruptcy proceedings, Mayer Brown’s London-based insolvency and corporate teams geared up to advise on the sale of the UK subsidiary to the highest bidder.
The sale process was not as simple as holding an auction, however. The highly regulated nature of the industry combined with anxious creditors - and liabilities amounting to $1.2bn - meant that the Mayer Brown team had their work cut out to ensure that the company was positioned to attract a bidder.
Assets or liabilities?
ATP UK’s six oil and gas fields across the North Sea were at varying stages of exploration and production. At the time of the sale, two of the fields were producing gas, one was close to the end of its life and in period of shut down and the other three were in the development phase. The production revenue from these producing fields was sufficient to cover the day-to-day costs through the sales process but not enough to pay off all its debts.
A bespoke floating oil production facility, which had been intended for use on the company’s development fields, was also in the middle of construction when ATP entered bankruptcy proceedings in the US.
Although the facility was three-quarters complete, the remaining construction costs totalled around $1bn. ATP UK was not in a position to finish the work and so looked around for a buyer for the rig, hoping that it would be able to sell it in its incomplete state to raise funds. However, its attempt to do so was unsuccessful, meaning that the rig remained a liability on the company’s balance sheet.
With liabilities in excess of $1.2bn and no interest in ATP UK having arisen from the auction process ongoing in the US for ATP Corporation’s assets, it quickly became important to establish the value of the ATP UK ’s business and discover whether these liabilities tipped the company into insolvency.
The value of the company’s assets was difficult to estimate, however.
“It is very much the case that the beauty is in the eye of the beholder when it comes to North Sea oil fields,” explains the co-lead lawyer on the deal, restructuring partner Devi Shah. “People hold very disparate views when it comes to value.”
“For all we knew, there could have been more than $1.2 bn of assets, which would have meant that we were not in an insolvency situation. We were optimistic at the start!”
ATP UK then brought in the corporate advisory team at Deloitte, the restructuring team at which had also been advising the company on a day to day basis, to run a marketing process. They were tasked with finding out who might be interested in acquiring the company’s assets and establishing the value of the oil-producing fields.
This represented the Mayer Brown corporate team’s first involvement with the deal, in January 2013.
“To start with a teaser was sent out to around 80 interested parties,” says corporate associate Jonny Musker. “Deloitte ran it and tried to cover the entire market of people who might be interested to try and gauge interest and valuations for the assets.”
Musker was involved in making sure that sensitive information was not disclosed to the wrong parties during the bidding, as the process can often attract false bidders, who try to fish for information rather than making a genuine offer.
“For me, the first stage of the marketing process entailed negotiating around 25 non-disclosure agreements with prospective purchasers and helping to co-ordinate the disclosure process,” he says. “Because it was clear from the response that there were a lot of people trying to fish for information on ATP. The North Sea is a very small world.”
“A fair few were quickly identified as not being genuine bidders but people who wanted information.”
The Deloitte and Mayer Brown teams whittled the auction process down from 80 potentially interested parties to 12 firm offers.
Because Deloitte had marketed ATP UK as both a whole company and as a series of assets, the marketing process had attracted bids for individual assets as well as whole-company offers.
During the latter stages of the auction process the profile of the various buyers crystallised and the front-runners could be identified.
“There had constantly been periods where one bidder seemed like it might pull ahead and then we found they weren’t as credible as first thought or funding didn’t stack up,” says Musker. “So there was a long period of working out who was credible to find the buyer.”
The auction process was in constant flux, with the eventual buyer, Petroleum Equity, originally bidding for just two licences, before committing to buy the entire company.
ATP UK were reluctant to sell off individual fields to multiple parties, however, the highly regulated nature of the industry meant that any sale needed the consent of the Department of Energy and Climate Change (DECC), who had indicated a strong preference for a sale of the whole company to one purchaser.
ATP UK needed to remain an ‘appropriate operator’ in DECC’s eyes, or the department might have needed to intervene. The department also wanted a clean transition from one party owner to another so that it could grant a single approval to a strong buyer rather than having to consider the appropriateness of multiple potential bidders who would each then need to be approved as ‘operators’.
“DECC’s shadow was always over us and ATP UK was in a constant dialogue with them,” says Musker. They knew that ATP UK’s parent was insolvent in the States and so we had to keep them comfortable with ATP UK’s situation,” says Musker.
“What DECC did not want was an abandoned oil field on their hands because of the huge risks that come with that,” says Shah. “Usually in this situation, administrators would sell off the assets one by one but obviously in our case it was preferable not to do that.”
The sale process was originally estimated to take around four months but by the time the sale was completed, it had taken over a year due to the large number of interested parties, the varied valuations, the approvals required and the complexities of clearing the company’s debt.
As the auction process wore on, dealings with DECC became more critical.
The three exploration licences that ATP UK held, which allowed the company to explore the relevant fields for possible oil and gas, came up for renewal during the purchase period, meaning that ATP was under heavy scrutiny from DECC.
If DECC was to refuse to extend the licences at any point, a substantial part of the value of ATP UK could have ceased to exist
“Going to DECC and asking for extensions when ATP UK was not financially strong – so that it was still an attractive proposition for a buyer – was difficult,” admits Musker.
In fact, DECC was very supportive, helped particularly by ATP UK’s proven track-record as an operator in the North See and in total granted three extensions during the sale process, stating that it was extending licences on the basis that the company needed to end up in the hands of an organisation it could approve.
Meanwhile, Shah’s insolvency group got to work restructuring the $1.2bn of debt looming over ATP UK and fending off threatening creditors.
“We had to monitor the courts on a daily basis for winding up petitions and act very swiftly whenever we saw something,” says insolvency associate Henry Glen. “There was a very delicate balance in negotiating with creditors who were agitating while advising the directors of ATP UK too.”
Clearing the debt
Dealing with creditors was a sideline compared to managing ATP UK’s debt, however.
During the marketing process it became clear ATP UK was indeed an insolvent company as the assets did not outweigh the liabilities. This meant that Mayer Brown needed to focus its efforts on getting the best deal for the creditors as well as achieving the best possible sale price.
But before the sale process could be completed, the majority of the liabilities needed to be cleared.
“The debts of ATP UK meant that it would only be a feasible prospect for any buyer if they were restructured” says the deal’s other co-leader, energy partner Rob Hamill.
The Mayer Brown team knew that they would not be able to locate a purchaser willing to buy shares if they did not first restructure the debt. When a buyer purchases shares in a company it means that it buys both the liabilities and assets. Not restructuring the debt would mean the purchaser would have been saddled with it.
“We needed to be able to deliver shares to someone from a company that was free of liabilities, so all they would get was the benefits and not the negative aspects – which was, after all, what they were paying for,” explains Shah.
To do this, her team decided to employ a company voluntary arrangement (CVA). The CVA involved, among others, ATP UK’s three main creditors: ATP Corporation itself (due to the inter-company funding it had provided over time) together with the US and Chinese joint constructors of the oil production facility.
The CVA required the three creditors to agree to their liabilities being compromised and discharged, meaning that the buyer would not take on the liabilities when they bought shares.
The CVA also had to be blessed by the Texan subset of the US Bankruptcy Court, as ATP itself was going through bankruptcy and needed its actions both in the CVA and the sale to be approved by the court. Shah made the journey to Texas with the MD of ATP UK and a team from Deloitte to attend the approval hearing.
“It was quite an interesting place to go,” she recalls. “I think we were the only ones in court without a gun.”
By asking the creditors to agree to the CVA, ATP UK agreed that they would receive a portion of the purchase price from the buyer when it bought the newly solvent company.
However, as the liabilities outweighed the assets, none of the creditors would receive the level of investment they put into the company.
“Ultimately, that was the incentive,” says Hamill. “Some money is better than none.”
Making the sale
The sale eventually completed on 10 February 2014, following the approval of the US Bankruptcy Court in December 2013 and the successful passing of the CVA in early February 2014. The eventual purchase price was £133m, meaning that creditors were only set to see around 10 per cent of their original investment return.
Sixteen months after $1.2bn worth of debt landed on the team’s desks, Petroleum Equity’s maiden purchase was granted approval by the Texan Bankruptcy Court and the company’s creditors, the assets having been successfully secured in the hands of the fully funded and committed new owner.
We had a trainee from each of the restructuring and corporate teams involved throughout the course of the ATP transaction and, although certain tasks they had to undertake were fairly unique to this type of transaction, they also had exposure to many of the jobs that a trainee in any group across the firm would commonly be asked to undertake.
On the corporate side, the trainee was responsible for producing and keeping updated the transaction documents list, which not only details all the documents that will be required but who is responsible for them, who is currently “holding the pen”, and who will be required to sign them.
On a deal with as many moving parts of this, and given its cross departmental and border nature, keeping abreast of documents was crucial in ensuring that everyone on the deal team, both internally and externally, is up to speed with current status and focused on what is outstanding. A corporate trainee can also expect to be asked to pull together first drafts of a number of the ancillary documents such as the disclosure letter and corporate authorities.
When a deal nears signing and completion, one of the key tasks for a corporate trainee working on a deal like this is to prepare and oversee the signing of all the documents.
On a physical signing this would literally involve walking the directors around the piles of prepared documents indicating for each of them where a signature is required.
On the ATP transaction however we needed to obtain a large number of signatures from the US and, given the timing, we knew there was only one real opportunity to do this, meaning it was crucially important that very clear email instructions were sent to our colleagues in the US who were meeting with the directors of ATP Corp to arrange for signatures.
The trainee, having been responsible for keeping track of the latest versions of all the documents, was asked to pull this together and then check that what was received back was as it needed to be.
The trainee in the restructuring team also had a number of day to day tasks to keep on top of, the most important of which was keeping a constant eye on the court filings to check that no creditors had issued any petitions for winding up or other such actions that would have had the effect, unless dealt with swiftly, of de-railing the transaction, particularly as we neared completion.
As with a corporate trainee, the trainee in the restructuring team also helped to draft large sections of the CVA document, which outlined the commercial deal to creditors and informed each of them how they would be treated if the CVA was successfully approved, which it fortunately was.
The hours can be long on a deal such as this, particularly with a US element, and the whole team sat up the night before signing ready to react to any changes to the deal that the Bankruptcy Court in Texas demanded when approving it.
The satisfaction of seeing a transaction like this through the completion can be very rewarding for all team members, from partners through to trainees who by that time had become very involved with both the company itself and the transaction, given that it had continued over the whole duration of their six month seats and longer.
Corporate associate Jonny Musker