On May 14, Ultra Petroleum Corp. filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
The largest natural gas producer and taxpayer in Wyoming operates exclusively in western Wyoming with 3000 producing wells in the Jonah and Pinedale fields. The company has 151 full-time employees.
Too Much Debt, Not Enough Cash
Ultra had previously halted new drilling in September 2019 citing multi-year low prices. The company planned to hold off on drilling until better prices returned. But now, no rigs are operating in western Wyoming at all, according to the Wyoming Oil and Gas Conservation Commission (WOGCC).
In its bankruptcy filings, the company cited high debt that it couldn't service, low prices, and impacts from COVID-19. The company owed $1.97 billion in debt and about $500 million in additional liabilities but only had $7 million in cash.
The reduced economic activity from the pandemic pushed natural gas prices further downward. In April, the average spot price for natural gas sat at $1.74, the lowest price since March 2016.
In April, Ultra warned of a potential bankruptcy filing in its annual SEC report. The company said its concentration in western Wyoming also led to additional vulnerabilities.
"We are disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, processing or transportation capacity constraints," amongst other issues, read the company's annual SEC report.
In its announcement, Ultra said it plans to continue business-as-usual with a $25 million loan secured. The company said it will continue to pay employee wages, royalty fees, working interest payments, supplier wages, and vendor wages in full.
Brad Johnson, the president of CEO of Ultra, said in the company's first day bankruptcy declaration that it plans to turn nearly all of its $2 billion in debt into equity. In other words, certain types of debt-holders would see their debt turn into common stock while others will get wither common stock 85 percent of their claim in cash.
"This financial restructuring will result in an enterprise with very little debt, good liquidity, and significant free cash flow that is underpinned by a large-scale, low-cost base of natural gas and condensate production," said Johnson in a statement.
Ultra Petroleum previously filed for Chapter 11 bankruptcy in 2016.
Sarah Foss, senior legal analyst with Debtwire, an intelligence service, said it's already clear this bankruptcy is different. Back then, creditors were paid in full and Ultra exited bankruptcy with $2 billion in financing to help operations, she said.
"The latest Consensus Annual Revenue Group (CREG) report forecast natural gas severance tax revenue to fall by 35 percent in 2020 from 2019."
"Now, about four years later, creditors are not getting much. They're just getting equity in the reorganized company, and there's only about a $60 million exit facility to fund their operations," Foss said.
She said the bankruptcy itself looks well-organized except for one wild-card. Unsecured creditors, who stand last in line to collect on debts, have not yet signed to support the restructuring plan. As it stands, those creditors are looking at $250,000 in cash in exchange for $375 million in unsecured notes.
Market Conditions
Prior to COVID-19, there were already difficulties within the market. Record natural gas production in 2018 and 2019 led to an oversupply of the resource. The U.S. Energy Information Administration expected production to flatten through 2020. Now, it expects a 5 percent decrease in production.
Clark Williams-Derry, energy finance analyst with the Institute for Energy Economics and Financial Analysis, said the industry had been having a tough time generating cash flow and raising money on Wall Street.
"Coronavirus has just made everything that much harder for the industry, which has cut demand. It's cut prices, We're seeing that much more difficulty in these companies to refinance their debt," he said. "Any company with debt coming due right now… it's gonna be a lot harder for them to refinance."
Williams-Derry added it's an extra wallop for states further from export locations. He said Appalachian shale producers are taking slightly less of a hit than inland states like North Dakota or Wyoming.
Natural gas was the fourth largest tax revenue contributor to Wyoming in 2019. The latest Consensus Annual Revenue Group (CREG) report forecast natural gas severance tax revenue to fall by 35 percent in 2020 from 2019; that report came out in January before the impacts of COVID-19 became known.
Mark Watson, supervisor of the Wyoming Oil and Gas Conservation Commission, said he's meeting next week with the CREG committee to go over renewed numbers as it relates to oil and gas.
Without giving too much away, he said, "it's gonna be down for sure."
Watson added Wyoming is in a good position if gas prices return given there will be lower supply, Wyoming has an abundant supply of the resource, and much of Wyoming's minerals are federal which means more income for the state.
Ultra hopes to exit the bankruptcy process within the next three months.
Have a question about this story? Contact the reporter, Cooper McKim, at cmckim5@uwyo.edu.
