Opportune was engaged by bank legal counsel on behalf of the Administrative Agent of the Revolving Credit Facility (“RBL”, or “Revolver”) for Gulfport Energy Corp. (“Gulfport” or “the Company” or “the Debtor”).

Opportune’s engagement was two-step:

Initially, Opportune advised the bank group on a potential extension of Gulfport’s RBL in conjunction with a proposed up-tier exchange of a portion of its $1.8 billion of senior unsecured notes (the “Senior Notes”) for up to $750 million of new second-lien notes. In the fall 2020 borrowing base redetermination, the RBL lenders voted to decrease the borrowing base of the RBL facility from $700 million to $580 million.

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During the up-tier negotiations, it became clear that an in-court process was necessary to sufficiently de-lever, so Gulfport pivoted to negotiating a restructuring plan with its bondholders, the RBL bank group, and the respective advisers (Alvarez & Marsal, Houlihan Lokey, and Opportune, respectively) that entailed converting most of the Senior Notes into common equity.

Gulfport’s restructuring was premised on both a financial restructuring, as well as a restructuring of Gulfport’s highly material natural gas transport commitments, through either renegotiation or rejection of transport contracts.

As a result, the negotiated restructuring support agreement (“RSA”) provided for the transaction structure discussed below and provided for specific milestones regarding the reduction of transport commitments as a condition to exit from Chapter 11.

Gulfport’s results are heavily dependent upon natural gas prices. During the bankruptcy case, gas prices improved over time, providing the Company with improved earnings and sufficient liquidity to meet its commitments under the RSA.

Transaction Structure/Financial Restructuring

• Eliminated approximately $1.8 billion of Senior Notes, of which approximately $1.2 billion was equitized.
• $580 million RBL facility consisting of a $400 million revolver and a $180 million amortizing Term Loan, repaid $15 million per quarter post-emergence over a three-year tenor.
• RBL lenders provided $105 million of new money debtor-in-possession (“DIP”) facility with a 1:1.5x roll-up ($157.5 million).
• In addition to exchanging $1.2 billion of Senior Notes for new common equity, the bondholders received $550 million of unsecured take-back notes and backstopped a $50 million equity rights offering in the form of preferred stock.

Key Issues & Accomplishments

• Sold Calls: Unique approach to arrange for willing counterparties to roll their deep-in-the-money positions into the DIP, fixing the Debtor’s exposure, providing highly collateralized support to the counterparties, significantly preserving liquidity for the case, and providing a path to enabling new hedging regimes going forward.
  • In 2019, the Debtors sold out-of-the-money natural gas calls for Cal22 and Cal23 and used the premiums to buy up strike prices on Cal20 natural gas fixed price swaps.
  • Leading up to the petition date in late November, the banks’ mark-to-market (“MtM”) exposure from the sold gas calls ballooned, and this exposure was secured pari passu with the outstanding loans and LCs under the RBL.
  • Before filing, the banks holding the Cal22 and Cal23 gas calls agreed to terminate 75% of the Cal22 calls (about one-third of the aggregate notional volumes of the calls) and allow the remaining derivative trades to ride through the bankruptcy, thereby avoiding the need for a much larger equity rights offering.
  • The remaining Cal22 and Cal23 sold gas calls, as well as the other prepetition and post-petition derivative trades with lenders, received super-priority treatment under the DIP credit agreement.
  • Further, the unwind of a portion of the sold call portfolio increased capacity for new commodity hedging, providing downside price protection during the case, as well as post-exit to the entire Lender group.
• Transport Restructuring: Designed detailed metrics as goals for the Debtors to reduce long-term transport costs through renegotiation or rejection.
  • As part of the exit structuring (detailed below), the Lender group required the Debtor to reduce its firm transportation costs by at least 50% and volume commitments by at least 35%.
  • During the case, Gulfport was successful in rejecting or renegotiating certain of its Firm Transportation (“FT”) contracts resulting in partial reductions for demand fees and volumes, respectively.
  • However, several of the FT counterparties’ contracts subject to rejection filed a motion to withdraw the reference on the rejection decision, pushing the jurisdiction to the District Court, despite the Bankruptcy court’s recommendation to hear the motion in favor of rejection. As a result, Gulfport was not going to have final orders in hand sufficient to meet its committed FT reductions and could not meet the condition precedent to enable the Company to emerge from Chapter 11.
  • As discussed below, the RBL Lenders amended the FT CP to emergence allowing the Company to exit while the FT rejection decision was still pending.
• Exit Flexibility: Provided a reasonable compromise for actual transport restructuring outcomes, based on unresolved rejections by the time of emergence, through an availability blocker.
  • A $40 million availability blocker was established to address that the Debtor had not achieved a final judgment on the required level of transport reductions.
  • The availability blocker is a credit-enhancing mechanism for the Lender group given the full reduction in transportation costs had not been met as planned.
  • In return, the RBL lenders amended the FT CP to emergence allowing the Company to exit while the FT rejection decision was still pending.

Exit Structuring Highlights

• As part of the pre-arranged RSA, Gulfport, the RBL lenders, and the bondholders agreed to multiple conditions that formed the basis for the agreement, as well as points of concern for all stakeholders.

1. Leverage: Less than 2.0x total leverage.
2. Liquidity: Minimum $80.0 million of liquidity at exit.
3. Hedging: Minimum hedge requirements for 80.0% of 2021 projected PDP volumes and 60.0% of 2022 projected PDP gas volumes.
4. FT Rejection: Reduce the PV-10 of aggregate gross demand reservation fees and reservation volumes by at least 50.0% and 35.0%, respectively.

• In addition to the conditions above, key structuring matters included certain restrictions on new transport commitments, dispositions, and limiting the ability to pay on preferred stock.

How Opportune Added Value

• Opportune provided invaluable support for the Agent in crafting the RSA and in devising solutions to the unresolved transport contracts rejections. Our insight into the needs of RBL lenders, coupled with our knowledge of Gulfport’s reserves and business case, allowed us to serve as a trusted business advisor to the Agent in achieving a resolution to the Chapter 11 process.
• Our critical evaluation of the Company’s reserves was instrumental in supporting the Agent’s engineering view and supported the ability to achieve lender consent for the final exit facility.
• We provided the underlying concept of an availability blocker to address the fact that the Company could not meet its commitment for getting final orders on transport contract rejection. The availability blocker and the related lender consent provided the basis for getting the Company out of Chapter 11—despite missing its CP concerning transport, avoiding significant ongoing case-related professional fees.
• Cash flow forecasting.
• Bank reporting analysis, including business plan reviews, DIP budgets, weekly and bi-weekly variance reports, and CP testing.
• Financial modeling.
• Hedge analysis and the treatment of the Company’s sold call options.
• Technical engineering analysis of the Debtor’s oil and gas reserves.
• Negotiations with the Debtor, ad hoc bondholders, and other stakeholders.

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Since its inception, Opportune has been one of the most active financial advisory firms in the energy sector. Our restructuring experience, coupled with our energy-industry expertise, maximizes value for constituents in a distressed situation. We think strategically, and deliver results both operationally and financially through hands-on, actionable implementation to meet the challenges of business turnarounds. We serve equity, secured lenders, unsecured creditors, and others throughout the capital structure to enhance value and increase recoveries during times of operational and financial crisis. For more information on our Restructuring services, CLICK HERE.