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| EPL > SEC Filings for EPL > Form 10-K on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Annual Report
General
We were incorporated in January 1998 and operate in a single segment as an independent oil and natural gas exploration and production company. Our current operations are concentrated in the shallow to moderate depth waters in the Gulf of Mexico focusing on the areas of offshore Louisiana as well as the deepwater Gulf of Mexico in depths less than 5,000 feet.
Recent Events
Background to the Chapter 11 Cases. Prior to our filing the Chapter 11 Cases, a number of events and economic conditions which existed in 2008 negatively impacted our business and liquidity. These events included the following:
• hurricanes in August and September of 2008 damaged third-party production pipelines, causing us to shut-in a significant amount of our production from September 2008 and continuing into early 2009;
• oil and natural gas prices declined in the fourth quarter of 2008 and have remained at low levels during 2009 relative to the levels in 2008; and
• the worldwide credit and capital markets collapsed in 2008 and the availability of debt and equity financing became significantly more scarce, thus reducing financial flexibility for most companies, including us.
These factors negatively impacted our business, and led to several circumstances that significantly affected our liquidity, including:
MMS Order and Term Sheet. We received an order from the MMS dated March 23, 2009 (the "MMS Order"). The MMS is part of the United States Department of the Interior. The MMS Order demanded that we provide to the MMS bonds or other acceptable security in the aggregate amount of $34.7 million to secure plugging and abandonment liabilities associated with all of our properties on federal leases in the Gulf of Mexico, with the first installment payment of $1.2 million due no later than March 31, 2009, an additional installment payment of $1.2 million due no later than June 30, 2009 and the remaining $32.3 million due no later than July 31, 2009. The MMS Order also required us to immediately shut-in production from all of our wells and facilities located in South Pass Blocks 27 and 28 in the federal portion of our East Bay field, while properly maintaining these facilities and wells with essential personnel. We promptly completed the shut-in of our federal East Bay facilities before the end of March, 2009. The production from the wells and properties that we shut-in as a result of the MMS Order constituted less than 5% of our average daily production as of March 27, 2009. We also made two installment payments of approximately $1.2 million on March 30, 2009 and on April 29, 2009 in compliance with the MMS Order and the term sheet discussed below. We entered into a binding term sheet with the MMS on April 30, 2009 to establish terms for us to address our obligations under the MMS Order. Under the term sheet, we and the MMS have agreed to re-affirm the terms and conditions of the previously established trust account for the benefit of the MMS under the Decommissioning Trust Agreement dated December 23, 2008 among us, the MMS and JP Morgan Chase Bank, NA, and we had agreed to make monthly payments to the trust account in the amount of $1.2 million while the Chapter 11 Cases are pending and, on the effective date of the Plan to make a payment to the trust account equal to $21 million minus the aggregate amount of the monthly payments made into the trust account while the Chapter 11 Cases are pending (commencing with the payment made on April 29, 2009). The $1.2 million monthly payments to the trust account remain subject to approval by the Bankruptcy Court. All remaining amounts owed to the trust account to reach the full funding amount owed to the MMS of $36.1 million (after giving credit to all prior payments made by us) were payable in equal quarterly installments of approximately $1.2 million, commencing October 31, 2009, with quarterly payments continuing until full funding has occurred. On June 11, 2009, we received a letter from the MMS requesting an additional $10.95 million in financial assurance based on the actual costs for partial and completed well plugging and abandonment associated with our federal leases in the East Bay field. On June 24, 2009, we advised the MMS that we will provide the additional $10.95 million by increasing our quarterly payments identified in the term sheet-such quarterly payments are presently contemplated to commence on October 31, 2009-which would increase the quarterly payments from approximately $1.2 million to approximately $1.8 million. The MMS agreed to vote in favor of the Plan to the extent its treatment is consistent with the terms set forth in the term sheet. In addition, the MMS has granted a consensual stay of the MMS Order that will remain in place while the Chapter 11 Cases are pending. This stay, however, does not lift the requirement that our Federal wells and facilities located in South Pass Blocks 27 and 28 remain shut-in. The term sheet with MMS contemplates that, on the effective date of the Plan, the MMS Order will be fully rescinded, and we will be allowed to resume production from these wells and facilities. However, the terms of the term sheet, as incorporated into the Plan, will only supersede the MMS Order if the Bankruptcy Court confirms the Plan.
Reduction of Borrowing Base. In March 2009, we received a notice of redetermination from Bank of America, N.A., the Administrative Agent under the Credit Agreement, that our borrowing base under the Credit Agreement had been lowered from $150 million to $45 million, resulting in a borrowing base deficiency of $38 million. Following the receipt of this notice, we considered various alternatives provided for under the Credit Agreement to repay the borrowing base deficiency and presented to the Administrative Agent the proposal of an installment repayment plan. The Administrative Agent declined to approve our proposed repayment plan, and as a result, on March 24, 2009, we received a notice from the Administrative Agent requiring the lump-sum payment by us of $38 million to the bank lenders under the Credit Agreement (the "Lenders") by April 3, 2009. On April 3, 2009, we obtained a consent from a majority of the outstanding commitments (the "Required Lenders") under the Credit Agreement, extending the due date for the repayment of the borrowing base deficiency until April 14, 2009. On April 14, 2009, we and the Required Lenders entered into a letter agreement that further extended the due date for repayment of the borrowing base deficiency until May 1, 2009 and provided that the Lenders agree not to exercise any rights and remedies until May 1, 2009 with respect to all outstanding and certain anticipated defaults by us under the Credit Agreement in exchange for our compliance with specified conditions. On May 1, 2009, we filed the Chapter 11 Cases.
Default on Senior Unsecured Notes. We were required to make annual interest payments of approximately $45.0 million each year on the Senior Unsecured Notes, of which $17 million was due on April 15, 2009, and remains unpaid. Our failure to make these interest payments within 30 days of the due date was an event of default under the indenture governing the Senior Unsecured Notes and under the cross-default provision of the Credit Agreement.
Surety Obligations. As of July 1, 2009, we had outstanding $60.0 million in surety bonds with four different indemnity companies. Our agreements with these indemnity companies allow them to demand cash reserves or letters of credit to support our outstanding surety bonds. In December 2008 and the first quarter of 2009, we posted cash collateral to restricted accounts for the benefit of certain of these indemnity companies totaling $5.7 million in response to requests to provide reserves against our surety bonds with them. If we default on some or all of these surety bonds, the indemnity companies may cancel our surety bonds. The cancelation of some or all of our surety bonds may result in violations of other agreements or obligations. As a result, we could be forced to shut in our production or lose our ability to continue to perform our business operations.
Plan of Reorganization; Plan Support and Lock-Up Agreement. On April 30, 2009, we entered into a Plan Support and Lock-Up Agreement (the "Plan Support Agreement") with the holders of more than 66 2/3% (the "Consenting Holders") of the outstanding principal amount of our Senior Unsecured Notes. The parties to the Plan Support Agreement had agreed, following receipt of the Disclosure Statement, to vote in favor of and support a plan or reorganization that is consistent in all material respects with the term sheet attached to the Plan Support Agreement ("Term Sheet").
The Plan Support Agreement may be terminated under certain circumstances by the
Majority Consenting Holders, including if (1) we fail to file the Plan or the
Disclosure Statement with the Bankruptcy Court on or prior to May 15, 2009;
(2) the Bankruptcy Court does not approve the Disclosure Statement on or prior
to June 30, 2009; (3) the Bankruptcy Court does not confirm the Plan on or prior
to August 15, 2009; (4) we do not consummate the restructuring transactions
provided for in the Plan on or prior to September 10, 2009, or under certain
circumstances, a later date; (5) we or any of our officers or directors fail to
take any action required by the Plan Support Agreement in order to comply with
our fiduciary obligations under applicable law or otherwise; (6) we file or
support a plan of reorganization that is different from the Plan or withdraw or
revoke the Plan; (7) we materially breach any of our obligations or fail to
satisfy in any material respect any of the terms or conditions under the Plan
Support Agreement; (8) our aggregate liabilities as of the dates specified in
the Term Sheet (excluding those liabilities that would be extinguished by the
Plan or otherwise do not survive the consummation of the Plan) materially exceed
the amounts we represented in the Term Sheet; (9) an examiner with expanded
powers relating to our business or trustee is appointed in any of the Chapter 11
Cases, any of the Chapter 11 Cases are converted to a case under Chapter 7 of
the Bankruptcy Code or any of the Chapter 11 Cases
are dismissed by the Bankruptcy Court; or (10) any definitive documents executed by us in connection with the Chapter 11 Cases in order to implement the Plan are not consistent in all material respects with the terms set forth in the Term Sheet and otherwise are not reasonably satisfactory in all material respects to the Majority Consenting Holders. In any event, the Plan Support Agreement terminates on September 15, 2009.
Bankruptcy Proceedings, Plan of Reorganization, Exit Facility and Expected Emergence from Bankruptcy. On May 1, 2009, we and certain of our subsidiaries filed voluntary petitions (In re: Energy Partners, Ltd., et. al., Case No. 09-32957) for reorganization under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101 et seq., as amended, in the Bankruptcy Court. We continue to manage our properties and operate our business as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court. On June 11, 2009, as part of the Chapter 11 Cases, we filed with the Bankruptcy Court the Plan and the Disclosure Statement, pursuant to which we solicited votes for the confirmation of the Plan. On July 31, 2009, we filed with the Bankruptcy Court our Second Amended Joint Plan of Reorganization, as modified as of July 31, 2009 (Plan). The Plan was formulated after extensive negotiations with committees representing holders of the Senior Unsecured Notes and holders of our common stock interests. The primary purpose of the Plan is to effectuate a restructuring of our capital structure to strengthen our balance sheet by reducing our overall indebtedness and improve cash flow.
On July 23, 2009, we announced that the Plan had received the affirmative vote of the holders of our Senior Unsecured Notes and our 8.75% Senior Notes due 2010 and we consequently proceeded to request confirmation of the Plan from the Bankruptcy Court. On August 3, 2009, after a confirmation hearing in which the Bankruptcy Court considered the Plan and all objections thereto, it entered into a confirmation order (Confirmation Order) and confirmed the Plan as of August 3, 2009. The effectiveness of the Plan and our emergence from bankruptcy is subject to several conditions, including the successful closing of the Exit Facility. We are currently in negotiations with lenders on structuring the Exit Facility. Fore more information on the conditions to the final effectiveness of the Plan see Item 1A"-Risk Factors."
The material terms of the Plan as confirmed by the Bankruptcy Court on August 3, 2009 include, among other things, that:
• each holder of the Senior Unsecured Notes and our 8.75% Senior Notes due 2010 would receive, in exchange for their total claim (including principal and interest), their pro rata share of 95% of the common stock to be issued pursuant to the Plan "New EPL Common Stock" in us upon our emergence from bankruptcy;
• each holder of our common stock interests would receive, in exchange for their total claim, their pro rata share of 5% of the New EPL Common Stock;
• upon the Effective Date, we shall have access to an exit working capital credit facility (Exit Facility) in form and substance acceptable to us and a majority in interest of the Consenting Holders (the "Majority Consenting Holders"); and
• we may adopt the 2009 Long Term Incentive Plan under which it may issue shares of restricted new EPL common stock and new EPL stock options to certain of its employees and certain members of management;
• following the effective date of the reorganization, the sole equity interests in us would consist of (1) New EPL Common Stock issued to the holders of our Senior Unsecured Notes, the 8.75% Senior Notes due 2010, and holders of our common stock interests, (2) restricted new EPL common stock issued to certain members of our management, if any, and (3) new EPL stock options to be issued to certain key employees pursuant to the 2009 Long Term Incentive Plan, if any, which would be exercisable for new EPL common stock. Collectively, the restricted new EPL common stock issued pursuant to subparagraph (2) and the shares reserved for the exercise of new EPL stock options pursuant to subparagraph (3) above would in no event exceed 3% of the new EPL common stock on a fully diluted basis.
The timing and ultimate outcome of the Chapter 11 proceedings remain uncertain. Issues and matters to be resolved prior to emergence from the proceedings include negotiation of the Exit Facility.
Consummation of the Plan is conditioned upon, among other things, the closing of the Exit Facility. There can be no assurance that any or all of the foregoing conditions will be met (or waived) or that the other conditions to consummation, if any, will be satisfied. Accordingly, there can be no assurance that the Plan will be consummated and the restructuring completed.
The above events and circumstances, together with the worldwide credit markets' collapse in 2008 and the scarcity of available credit from most major commercial financial institutions, as well as the low trading price of our common stock, make it extremely difficult to find additional financing, either to refinance our Credit Agreement or our Senior Unsecured Notes or to provide additional liquidity during 2009.
Restructure of Prepetition Employee Arrangements. Prior to May 1, 2009, various incentive and retention plans and agreements existed for certain of our employees (collectively, the "Arrangements") that provided for such employees to receive cash payments and/or settlement of equity compensation awards either upon specified future vesting dates or in connection with a termination of employment. The Plan Support Agreement contains certain provisions that provide that such Arrangements must be amended, renegotiated, and/or restructured prior to the effective date of a confirmed plan of reorganization.
As a result of the Plan Support Agreement, the Board of Directors amended the provisions of the Energy Partners, Ltd. Change of Control Severance Plan (the "Severance Plan) in a manner such that the protected employment period initiated by our change of control under such plans, as well as the severance benefits potentially payable in connection with certain terminations of employment during that protected period, would not be triggered by the restructuring contemplated by the Plan Support Agreement.
We also established two programs, a non-insider employee retention program and a senior management employee program (collectively, the "Retention Programs"). In order for an office employee who participates in either of these programs to receive his or her retention payments, the participant has to waive and release any and all potential claims against the Company under the prepetition Arrangements.
Finally, the written change of control severance agreements (each a "Severance Agreement") with two of our executives were terminated by the Company and each of such executives in exchange for the executives receiving an unsecured claim for the rejection damages.
The total cost of the Retention Programs and the termination of the two Severance Agreements is approximately $2 million of which approximately $0.5 million has been paid during the bankruptcy proceedings and approximately $1.5 million will be paid when we emerge from bankruptcy.
NYSE Delisting. In March 2009, the NYSE notified us that our common stock had been suspended from trading and was subsequently delisted for failure to maintain the required market capitalization minimum criteria. Our common stock is being quoted for public trading on the Pink Sheets quotations system, an over-the-counter market, under the symbol ERPLQ.PK. This significantly impairs our ability to raise additional equity financing.
Changes to Production Levels. Due to our current liquidity situation and lower commodity prices, we expect to significantly reduce capital expenditures during 2009. As a result, we do not expect to be able to maintain our current production levels and we expect our production to decline significantly during the second half of 2009 primarily due to natural reservoir declines combined with minimal investment in reserve replacement activities. At our current and anticipated production levels, combined with the current and expected lower sales prices, we do not expect to have sufficient cash flows to fully fund our operations and meet all of our financial obligations in 2009 as discussed above.
Changes in the Board of Directors and Management. Commencing in the first half of fiscal 2009 and continuing through the date of this filing, we have experienced major changes in the management of our company. Our Board of Directors declined from eleven to five members during the first quarter of 2009. In addition, on March 1, 2009, Joseph T. Leary resigned as our Executive Vice President and Chief Financial Officer. On March 15, 2009, Richard A. Bachmann resigned as our Chairman and Chief Executive Officer and we engaged Alan D. Bell as our Chief Restructuring Officer. In July 2009, we announced the designation of Alan D. Bell as principal executive officer and Tiffany J. Thom as principal financial officer.
Overview and Outlook
Results of Operations
During the year ended December 31, 2008, we were successful in 16 of 17 drilling operations and 7 of 10 recompletion and workover operations, much of which was substantially completed before the fourth quarter of 2008. We significantly curtailed our drilling operations beginning in the fourth quarter of 2008 and expect to remain at significantly curtailed drilling activity levels during 2009 due to the factors impacting our liquidity addressed under - "-Recent Events."
Our operating results for the year ended December 31, 2008 compared to the year ended December 31, 2007 reflect a decline in production from our existing core oil and natural gas properties due primarily to natural reservoir declines, and the impact of the hurricanes which shut in a significant amount of our production from September 2008 into early 2009, resulting in an average decline of approximately 18%, or 2,800 Boe per day reduction, from our pre-hurricane production. Our production level also declined due to the sales of producing properties in June 2007 and March 2008. The June 2007 sale of onshore producing properties (the "June 2007 Property Sale") contributed an average of 2,742 Boe per day from January 1, 2007, through the June 12, 2007 sale date. These impacts were offset in part by successful drilling results in 2008.
Higher average oil and natural gas prices contributed favorably to our revenues for the year ended December 31, 2008 during which we realized a 44% increase in our average sales price per Boe (exclusive of derivative instruments) over the year ended December 31, 2007. The precipitous decline in oil and natural gas prices that began in the third quarter of 2008 is not fully reflected in our realizations for the full 2008 year because of the significant decline in our production as a result of the hurricanes which impacted production from September 2008 into early 2009.
For the year ended December 31, 2008, our revenues declined 22% as compared to the year ended December 31, 2007 due primarily to declines in production volumes. The declines in production volumes were due primarily to natural reservoir declines and the impact of hurricanes addressed above, partially offset by increases in the average sales price of our production during 2008.
In addition to the items addressed above, our net loss of $52.2 million for the year ended December 31, 2008 reflects:
• impairments of producing oil and natural gas properties of $39.3 million due primarily to the decline in estimated sales prices of oil and natural gas;
• impairments, due primarily to our cash flow constraints, of capitalized costs of $47.5 million related to two deepwater properties for which development activities are suspended pending the determination of proved reserves;
• impairments, due primarily to our cash flow constraints, of unevaluated property costs of $20.8 million related to leases expiring in 2009 and 2010;
• losses incurred on abandonment work of $21.7 million primarily related to abandonment work completed in 2008 and estimated cost of abandonment work planned for 2009;
• a decrease of $68.0 million in dry hole and exploratory costs as compared to 2007 primarily as a result of reduced exploratory drilling activities;
• a decrease in general and administrative expenses ("G&A") as compared to 2007 resulting primarily from G&A during the year ended December 31, 2007 related to our review of strategic alternatives and the repurchase of 8,700,000 shares of our common stock at $23.00 per share, refinancing our bank credit facility and acquisition of substantially all of our existing $150 million 8.75% Senior Notes due 2010 (the "Transactions").
Cash Flows
Our operating cash flows for the year ended December 31, 2008 were impacted by the hurricanes which caused nearly all of our production to be shut in at one time or another during the third and fourth quarters of 2008 and by lower oil and natural gas sales prices during the fourth quarter of 2008.
Our most significant current challenge is addressing our severe liquidity constraints by completing our Chapter 11 bankruptcy proceedings, securing exit financing and consummating the Plan. Our near term strategy includes the recapitalization of our balance sheet, targeted cost reduction activities, and significantly reduced drilling expenditures during 2009. The sales prices of our oil and natural gas will have a significant impact on our plans beyond 2009. If sales prices continue at the current low levels, our anticipated investment will not be adequate to maintain our current production levels and we expect our production to decline significantly during the second half of 2009 due primarily to natural reservoir declines. As further addressed under "-Financial Condition, Liquidity and Capital Resources," at our current and anticipated production levels, combined with the current and expected lower sales prices, we do not expect to have sufficient cash flows to fund our operations and meet our financial obligations in 2009.
Tropical Weather Impact
In late August and early September 2008 Hurricanes Gustav and Ike traversed the Gulf of Mexico and adjacent land areas. As a result of these two hurricanes, nearly all of our production was shut in at one time or another during the third and fourth quarters of 2008. We maintained insurance coverage for property damage due to windstorms with a deductible of $10 million for each hurricane. For these occurrences, we also previously maintained business interruption insurance on a portion of our lost revenue on our South Timbalier 41, 42 and 46 properties, which represented 37% of our 2008 year to date daily production volumes prior to the hurricanes. Recovery of lost revenue from these properties began accruing in November 2008 when the "no claim period" provided for under the policy elapsed. Through December 31, 2008, the total business interruption claim on these fields was $4.2 million, all of which is recorded in other receivables at December 31, 2008. All of these amounts were collected in 2009. In order to mitigate the higher cost of insurance coverages in 2009, we negotiated higher deductibles and significantly lower aggregates for property damage due to windstorms. Further, we no longer maintain business interruption insurance.
Dispositions
In March 2008, we completed the sale of two Gulf of Mexico Shelf properties located in our Western offshore area (the "March 2008 Property Sale") for $15.0 million after giving effect to preliminary closing adjustments. We recorded a gain on the sale of $7.1million.
We have included the results of operations of dispositions discussed above through their closing dates. We experienced substantial revenue and production fluctuations as a result of these dispositions and the tropical weather impacts discussed above. For these reasons the comparability of our historical results of operations with future periods may be materially impacted.
Outlook
We continue to generate prospects and strive to maintain an extensive inventory of drillable prospects in-house and exposure to new opportunities through relationships with industry partners. Generally, we have attempted to fund any exploration and development expenditures with internally generated cash flows; however, from time to time during 2007 and more significantly in the fourth quarter of 2008, we used our bank credit facility to fund working capital needs as further discussed under the caption "Financial Condition, Liquidity and Capital Resources." . . .
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