Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. This week, we're very pleased to have on the show Steve Church and Amelia Pollard, who covered bankruptcy at Bloomberg News based in Delaware and New York, respectively. How are you both doing today?
Fantastic?
Thanks for having us, James.
Thank you for joining us. We're also delighted to welcome back on the Credit Edge Spencer Cutter, a credit analyst with Bloomberg Intelligence in Seattle. There's a big story brewing in the oil sector and we'll be looking at that with Spencer just a little bit later in the show, So do stay with us. But first, Steve Church, with Bloomberg News, you've been covering the bankruptcy courts for years. We've had the pleasure of working together for a lot
of that time. As you've reported, a prominent bankruptcy judge is stepping down after revelations that he dated and lived with a top Houston bankruptcy lawyer since twenty seventeen. I'm not going to get into that scandal or why it took six years for anyone to figure that out. I mean, Houston's not a big town. People must talk to each other, especially in a small world like bankruptcy. But it really is amazing to me that no one saw that coming.
But more interesting to the credit markets, who is Judge Jones and why is it such a big deal that he's leaving the court?
I think the big deal is Jones was known as a judge who could work fast, was willing to make hard decisions quickly without spending months of expensive litigation or expensive briefings. He always let companies and creditors know upfront what he was thinking. He did that deliberately because he thought it would speed up the process and save money
in the long run. But most importantly, I think corporations in distress began to look at Texas as a place to return to to bring their bankruptcy cases there because Jones and another judge, judge is Gar that he knows
very well. The two of them have worked together for years, because they made such a powerful team, and because they were so willing to make a lot of adjustments to how the process worked, not only legal rulings so much, but definitely to make it easier to get into the court easier to file cases, and of course they both
have expertise in oil cases, big oil cases. Corporations got comfortable coming to Houston, and so a lot of the biggest law firms brought their cases there because of Judge Jones primarily and judgees Ger.
And one of your sources described it as a nightmare for the bankruptcy bench. You've been covering this a long time to see though, So how much of a surprise was it to you and how well did you know the judge.
I've been listening to the judge for many, many years. He is one of the rare judges who will actually talk to the press on background, and occasionally he would communicate on the record when he was talking about certain issues that were not directly involved in a case. So he was approachable. So I knew him fairly. I wouldn't say very well, but well enough to be able to call him up and ask him what was going on with the process of bankruptcies in general, not about specific cases.
He simply wouldn't comment on that. And as for the surprise I was, I was very surprised. I was shocked, actually, And the lawyers that I've talked to who are not Houston lawyers, some of the big bankruptcy attorneys that have been around for many years. They had no idea, they said, they did not know what was happening.
So Amelia tell us about some of his cases. You know, what was he actually involved with? And you know why was he so important for bankruptcy.
Yeah, So what I started covering bankruptcy, which was only in January. Some of the biggest cases that were coming before him were ones with so called liability management deals, which is basically a jargony word for these contentious debt deals that get done between creditors and they're often known for spurring you know, credit on credit or violence or fights.
And so he became very important recently with those types of deals and companies that had done those transactions because he was willing to kind of go above and beyond other courts and making quick decisions, sweeping decisions when other courts, you know, district courts or the like, would take months and months to make make a call or a ruling. And so one case we watched with this play out with was the mattress maker Serta. Simmons had an infamous
debt deal that was highly contentious in twenty twenty. It filed for bankruptcy in January before Judge Jones, and within a matter of months he was willing to make, you know, a sweeping opinion that basically blessed the deal and said that it was done in good faith and was an open market purchase. Two, you know, components that were highly
litigated prior in other venues. So you know, we heard from sources far before Judge Jones resigned that companies had similarly contested deals in their belts were going to make sure that they had, you know, some kind of jurisdiction in Texas if they did have to file for bankruptcy. You know, with the idea that they wanted to be in front of Jones.
Why and maybe you could win bits on this as well as Steve. But why do you think he was so good at handling these really tough cases.
He was a litigator for many years. He did a lot of oil litigation in the bankruptcy courts, and his personality is lent itself to being willing to press forward with not with minimal information, but without requiring a huge amount of back and forth between say, creditors and the companies that require months of briefing. He would often give you an he was willing to take the risk that he might be wrong. He was very confident on the bench.
He had a lot of experience with the kinds of cases that were coming in front of him, and he would often say, well, when I was in practice, we had these kinds of issues. He was also an expert in litigation, in the daily grind of two parties fighting with each other to collect information about each other and to decide what was presentable to the court what was off limits. And he cut through those those kinds of
fights which can bog down a lawsuit for years. He cut through that very quickly, and that's what made him sort of a favorite among a lot of companies that are in distress.
Obviously, speed of execution is great when you're dealing with lawyers that cost thousands of dollars an hour. But did he always get it right?
That's a good question.
Well, it depends on who you know, which side of the eyele you're talking to. I would say there are a number of cases on appeal now that he rolled on, so yeah, But I do will say that, like one source I spoke to, who's a professor, you know, did go on for a while when I spoke to him earlier this week about how well respected Judge Jones was, and you know, he was known for someone who worked
incredibly hard. He was willing to you know, schedule, you know, the first stay hearing of a case near hours after a case was filed. And so I think that big law firms also, you know, demanded a certain level of you know, kind of intensity and readiness to take on big cases and clear your schedule, you know, if a multi billion dollar case comes onto your docket. So I think there was a lot of respect among you know, all sides for that.
I can't think of a specific case, a big case where he was overruled by either the district Court or the Court of Appeals in Houston. He had a good enough reputation, and the court itself, including Judge is Ger and now Judge Lopez, they have strong reputations and that means something thing to the judges above them, the judges who have to review their decisions. So they were not overruled very often.
And companies that had any reason to file, maybe they had a unit in Texas, they would deliberately go to Texas just so they could deal with Judge Jones.
Is that right, Jones?
Or I isger Yes, Okay, We're creditors as happy as the companies to be down there.
In most cases, some creditors some It depended on the case. I think some creditors may have viewed him as with a little suspicion because he was willing to go fast, and creditors often want to go slow in order to negotiate and bargain and see if they can get more money.
So, given the conflict of interest that has now come to like Judge Jones and the lawyer he was personally involved with, isn't there a risk that some creditors may go back and even some companies go back and challenge some of the cases that he oversaw.
Yeah, there is, you know, sources did say this week that there is that risk, and there's not a lot of precedence for this. I mean, this is a a really specific case and just the sheer volume of cases that were before Judge Jones makes this a logistical nightmare. But today we did see you know, there was a brief filed in the appeal of Surda and the lenders who are appealing the case are the ones that were
left out of the deal? Did mention just you know, basically as a line item that because Judge Jones resigned, there's some reason to believe that the case should be you know, punted either to the district court in Texas or back to the court in New York. It didn't mention the scandal or you know, make any claim that because of the scandal and the resignation the whole thing
should be overruled. But I think that it'll be used as a as a bargaining chip for sure, especially in highly contentious cases where you know, lenders are grasping at anything to build out their argument.
Steve, do you expect to see some of those old cases were the ugly heads again?
Oh, lawyers will try. I think it's an easy argument to make. It's a hard one to win. Unless you can specifically link a decision he made to the conflict that he that caused him to leave. That might be possible, but I suspect it will be on a very It'll be a limited number of cases that can actually make that leap.
But the law firm that he you know, he was involved with a lawyer as a prominent law firm. That law firm was involved in some big cases.
That law firm mostly worked as what they call local council, which meant they did they did not take the lead on a lot of the most contentious issues. So you'd have a national law firm, say Kirkland and Ellis, Wyle Gotshaw, Aiken and Gump, one of these very big, you know, world straddling law firms that actually did the most important
and contentious work. And the argument will be made by the winners of John Jones's cases that Jackson Walker did small amounts of work and therefore they don't have to that you shouldn't overturn it. They weren't involved, but there were some cases that Jackson Walker did did handle themselves. Those cases could be You could make the argument, especially if something new comes out about the fees that were paid or about any other conflicts of interest related to his girlfriend.
What are the other big takeaways from this case? Anything else come delight from your reporting.
There's one irony. Judge Jones made some enemies, He made some very He made people angry. There was one well known Wall Street distress debt trader who was convicted of essentially manipulating the bankruptcy process because he was playing he was using his position in the Nieman Marcus case. Neman Marcus, the retailer, the luxury retailer that went bankrupt. This Wall Street insider was using his position, his knowledge to do
to threaten other participants in the case. Jones went ballistic when he found out about this and personally pushed for prosecutors to look at this Wall Street trader, and the person was eventually pled guilty. That's one example of a very angry a person, very angry judgment. One other, and that is the consulting company. McKenzie was accused by some creditors and by the US trustee of not disclosing their
own conflicts of interest. At one point, when handling these allegations, Judge Jones told them that some careers might be ended because of this, and that he was perfectly willing to submit a recommendation to prosecutors if he found that there were problems. He didn't make any final rulings that specifically sanctioned McKenzie, but he made enough of a problem for them that they spent a lot of money defending themselves,
and eventually that case did go on. In other courts that that continue to use some of Judge Jones's findings and rulings.
Interesting, Amelia, did you have other observations.
I was just going to say that, you know, there have been pushes historically for a venue reform, and you know, it's a very hard piece of legislation to draft from what I hear, and I think that some people do expect there'd be renewed calls for venue reform, like the fact that Houston alone as a venue had I think more than a third of national cases and there are surely not that many companies based in Houston or you know, Texas with a prominent footprint there, and so I think
that that will be something to watch out for in the coming months, to see whether there's kind of greater scrutiny on the bankruptcy process and you know what sort of sorts of reform or calls for it come out of this great stuff.
Steve Church and Emelia Palla from bloom News, thank you so much for joining us.
Thank you, James.
Thanks James.
Read all of their great scoops on the Bloomberg terminal, and of course at Bloomberg dot com, bankruptcy is a huge story. We have a fantastic global team treking it so do check it out. Thanks so much. As I mentioned earlier, we're joined by Spencer Cutter from Bloomberg Intelligence in Seattle. It's great to have you back on the show.
How's it going, James, Thanks for having me back again. It's going well great.
So we hit so well M and A. That is consolidation in the energy sector, oil and gas companies buying other, mostly smaller producers, so oil prices are up. Producers are enjoying a windfall. Have they run out of things to do with the cash they now have to buy each other? Is that the end game here?
Well, there's a couple of things going on. The part of the cash that they've been generating over the past year has been going out the door to shareholders in the form of stock buybacks and these variable dividends, and a lot of companies have basically committed to saying we will return something in the neighborhood of fifty to even seventy five percent of free cash flow every quarter every
year or two shareholders. But there's also a lot of fragmentation within the industry, and there's a lot of small to medium sized players and there's not You know, if you roll the tape back ten years ago, it's kind of the wild West with the shale revolution and a lot of basins that we're not producing all of a sudden that we were able to produce, and that's kind
of run its course to a large part. So now there's expectations that there should be some consolidation within the industry to bring some of the scale on scope that you would get in that case. So we've seen some M and A activity certainly over the last couple of years. But with the announcement of Exon buying Pioneer, there's some expectation that that could really push everything into high gear.
That was a big deal, right, how much was it worth?
Sixty billion? Yeah, it's a very big deal. And it is basically focused on Exon expanding its footpair footprint in the premium basin, which is the premier basin in the United States and North America.
And is it really is it really simple as just big companies like Xon buying the smaller ones.
I think you're gonna you could see you could see a couple of different things. You could certainly see big companies like X like Exon trying to expand their footprint in certain areas. So you know, Chevron could be a buyer of another large company if they want to do
the same thing. But I also think you could see a lot of consolidation within the mid tier and two smaller to medium sized companies kind of teaming up to be to make a larger you know, certainly nothing on the rival exon, but a much larger producer within a certain area. So I think you're going to see both of those. And you know we're talking about you know,
credit focused podcasts here. Fortunately, today, I think whether it's a big company buying a smaller company or two mid sized companies merging, I think it's going to largely be a credit positive event for bondholders of in in most cases, is.
It simply the case as in other commodities that bigger is better, just more efficient, bigger reach, all that stuff.
Yeah, to a certain extent, Yeah, bigger is better. And there's a couple of things driving my view that I think this is a positive for creditors. You know, usually when you start talking about M and A, bond holders get a little bit nervous because, on the one hand, you could have the city scenario of a big A double A rated credit buying a smaller B or double B rated credit, and then the small bondholders of the smaller companies certainly make out with a bit of a windfall.
But you could also have the opposite extreme with extreme
which is an LBO. But we haven't been seeing LBOs or highly levered deals in the oil and gas space for quite a while, and it's largely because of the downturns we saw in twenty sixteen in twenty twenty where you had waves of bankruptcies, and ever since then, companies have been very focused on rebuilding and reinforcing their balance sheets, paying down debt, and one of the ways they've done that is not just paying down debt, but also acquiring
other companies in all stock deals. So if you look at the deals that have been done since twenty twenty, all the large deals, almost all the large deals were one hundred percent equity focused, and the handful of large deals that weren't so Like when Pioneer bought Double Point, there was a large cash portion of that that involved a private equity firm, and so private equity companies obviously would rather have cash than stock. They'll take some stock,
but they need something to return to their LPs. So I do think you're going to see most of these deals be structured as largely, if not all stock, mostly stock. And then the Exxon Pioneer case, you saw that, so it's a continuation of that, and then the other you know, let's talk about a merger of equals. And you mentioned is bigger better, not oil focused, but natural gas focused. This week there were rumors that Chesapeake is looking to
buy Southwestern. These are two natural gas companies. They're both fairly large North America, but small when you compare them to a Chevron or Exxon, both double B rated credits. And my view is if those two combine in an all stock merger, that would give it much bigger footprint, more size and scope and business diversity, and that could then lead to an upgrade in their credit ratings because the agencies do do look at that as a primary factor. You know, bigger does give you certain advantages.
Is there any associated issuance with this? I mean, you know it's all stock deals and the obviously on the LBO side, debt is hugely more expensive than it was. But is there going to be liability management? Is there going to be cleaning up the balance sheet. I mean there have been also some some issuance of energy companies over the last few weeks. Actually, so I was wondering, do we see more new money coming out?
You could see some liability management to the extent that the acquiring company may want a tender for some of the target companies bomb ones. Maybe they want to change the covenants or somehow to match you know, the indenture for their existing bonds, so the new you know, the whole every bond that is now underneath that corporate umbrella is relatively identical from a covenant standpoint, or maybe they just sort of want to clean up the balance sheet.
You mentioned some of the activity new issue activity.
A lot of that.
You know, I've been going here talking about how a lot of these M and A deals are equity focused, but when you do look at some of the smaller ones, there has been some debt, and again a lot of
that is PE related. So Civitas Resources is a was a relatively small oil and gas producer focused in the DJ basin, and they have gone from having only four hundred million of bonds outstanding at the end of last year two uh now they are the largest issuer in the High Yield Independent Energy index because they have announced that they have They have announced and closed on two deals and just announced their third, and each one of
those did involve quite a bit of debt. But they were buying assets from private equity companies, which, like I mentioned earlier, pe company will take some stock, but they also need some cash so that they can give that back to their investors pretty quick.
Are there any relative value place here? Is there an opportunity for an investor to I mean, I'm just going to be cruely breaking it down. I'm not an investor in any means, but find a target company that's junk rated that might be brought by an investment grade company, buy the bonds and hope for an upgrade and get some money there.
Yeah. I mean, if you want to play that angle, the thing to do is look at who has I think you're going to want the target company to have
a fairly first of all, a clean balance sheet. Nobody wants to acquire a mess and a fairly simple asset profile, so reserves in one, maybe two basins, and that their reserves are located fairly close to some of the larger producers who have a bigger balance sheet and higher credit ratings, and the theory being the larger producer understands that region already has operations in that region, has people on the ground, has gathering and processing infrastructure, and would be relatively easy
for them to then acquire the adjacent acreage and then hook up all their systems to that newly acquired acreage. There'd be certain synergies because now you have one company running instead of two. So that's kind of the playbook. You know, Pioneers is focused in the Permian, and then
you look at sorry Chesapeake Energy. Now they're trying to be the acquirer here, as is rumored, But if you look at what they've done, and you know, I've been writing about this for a little while, they when they came out of bankruptcy, they had sort of diverse assets kind of all over the North, all over the United States, and they have since sold off a bunch of the non core assets, paid down some debt, and they're now
focused on just two regions. And if you look at that kind of like, okay, they don't have a whole lot of debt, and they've streamlined their operations and their reserve base. That makes it fairly easier for them to either be the acquire or get acquired. So I'm not surprised to see them in the market a rumor at least to be in the market to do some sort of deal.
In basic terms of these deals, this ma that's going on, This is more just companies in you know, mostly fossil fuels companies just buying up more production. They just want to produce more barrels or more liters of whatever is they're producing.
Yeah, for a large part that is most of what you're seeing. Keep in mind, you know, it's a depleting asset base, so every barrel of oil you pump out of the ground depletes, you know, is a barrel you can't pump out of the ground ten years from now.
So you need to keep replacing that asset base. And that can be either through you know, going out and exploring for new reserves somewhere in the world, and there certainly is quite a bit of that going on, particularly offshore, or you can just acquire somebody else's already existing reserves and hope that you can get a good deal and then that extends your reserve life profile. You've also seen
some deals involving esg angles. So another excellent deal Denbury Resources that was largely I think an esg angle because Denbury does this enhanced oil recovery process where you basically take CO two and inject it into the ground in an existing producing well to increase the pressure underground in that well to then force more oil and gas molecules out up to the surface. And so you're getting more gas out, more oil and gas out, and you're taking
CO two and injecting it in. And they also have two network of CO two pipelines to help facilitate this, and of course in this day and age, trying to find ways to inject CO two back into the ground is something that people look pretty favorably upon.
But they're not buying wind farms or solar that they're staying in fossil fuelds, right.
They're largely staying in fossil fuels. Occidental Petroleum is branching out not into wind farms or solar, but into this direct air capture arena. So kind of similar to the Exxon buying Denbury, but that's a sort of buying a proven company with proven operations. Occidental is I'm gonna get a little bit out of my area of expertise because direct air capture, from what I understand, is a slightly proven technology, but not proven on the scope and scale
yet that Occidental is hoping to build. But they're basically planning to spend billions of dollars to build these facilities that just essentially, as the name implies, sucks carbon dioxide out of the air directly and then they can take that put in a pipeline acted somewhere else in the ground. So you are seeing a little bit of that. Occidental is kind of the poster child for trying to lead the charge developing a new area, and we'll see how that goes.
It's a credit show. So I always like to talk about risk. What are the risks here? I mean, surely these companies can't just get bigger and bigger and endlessly be acquiring resources.
There's got to be some limits, right, Well, it depends if you're talking about the short term risks or the long term risks. Is sort of like, you know, as the economists say, in the long term we're all dead, and in the long term we will eventually run out of oil and gas and if you're an oil and gas producer and that's all you're doing, well, then you don't have a business anymore. And there's lots of different theories out there as to what that runway looks like.
And I'm not going to to argue one point or the other other than to say there is a lot of evidence coming to light that within the United States, the shape revolution as it was, a lot of the best reserves have been drilled and produced, and you're going to have to start to expand out into second tier type reserves, which will cost just as much to drill, but you can get less oil or gas out of the ground from it, so your relative cost per barrel
of oil produced goes up. So that could be one reason for these companies to then continue to try to expand through MNAs, to try to continue to buy these good reserves while they still exist. You know, the other credit risk is just leverage and commodity prices. So you know, oil has been holding fairly steady north of seventy dollars a barrel now for several years, ever since we've bounced off of the historic loths of twenty twenty. But if
we hit enter a global recession that that could certainly change. Fortunately, as I've mentioned, most of these deals have been funded largely, if not exclusively, with stocks, so you haven't seen leverage climb very much, if at all, so that the sector as a whole is about as healthy as it's ever been from a credit scandpoint. But there are always these exegenius factors that can come into play when you're talking about a commodity based business and you.
On a high note, Spencer Cutter, Bloomberg Intelligence, thank you very much for joining us.
Sure, thanks for having me, and we hope.
To have you back on the show very soon. Please do check out all of Spencer's great research on the Bloomberg Terminal and thanks again to Steve Church and Amelia Pollard from Bloomberg News. Read all of their great scoops on the Terminal and at Bloomberg dot com, and please do subscribe wherever you get your podcasts. We're on Apple, Google and Spotify. Give us a review, tell your friends, or email me directly at jcrumby eight at Bloomberg dot net. That's J. Crom b i e as in my surname
and the number eight at Bloomberg dot net. I'm James Crumby. It's been a pleasure having you join us again next week on the Credit Edge