Ultra Petroleum sees substantial bankruptcy risk; interest payment not coming on 6 1/8% notes

By Caroline Salls

Pittsburgh, April 29 – Ultra Petroleum Corp. said there is still substantial doubt about its ability to continue as a going concern, despite some improvement in crude oil and natural gas prices, and it does not expect to make the $26 million interest payment due April 1 on its 6 1/8% senior notes due 2024 before the end of a 30-day grace period, according to a 10-Q filed Friday with the Securities and Exchange Commission.

As a result of its current financial constraints, including the likelihood of the occurrence of events of default under its debt agreements, the company said there is a substantial risk that it may need to seek protection from creditors through a Chapter 11 bankruptcy filing or a filing under the Canadian Bankruptcy and Insolvency Act, or an involuntary petition for bankruptcy may be filed against it in the United States or Canada.

Although they have increased somewhat in recent weeks, the company said product prices are still historically low, and Ultra Petroleum’s “financial condition continues to be distressed.”

Ultra Petroleum said it can provide no assurance that it will be able to obtain waivers or other relief if it is unable to comply with existing debt obligations, and it is unlikely that it will be able to comply with all of the obligations and covenants in its debt agreements. In addition, the company has substantial unpaid principal maturities and interest payments that are past due on its debt.

In addition, the company said it has substantial additional principal maturities and interest payments coming due soon, and it does not have sufficient liquidity to pay unpaid and near-term principal maturities and interest payments or to pay its debt if accelerated without raising additional capital, which may only be available “on extremely onerous terms if it is available at all.”

Ultra said it continues to negotiate a debt restructuring during the forbearance periods set in agreements with lenders and unsecured senior noteholders, but, as of Friday, no restructuring agreement has been reached.

In order to extend the forbearance period beyond April 30, the company said it would need the approval of 100% of the noteholders, which it believes is highly unlikely.

According to the 10-Q, if the company does not make the interest payment on the 6 1/8% notes by the end of the grace period, an event of default will occur, which may result in acceleration of all of the company’s debt.

Recent events

Events that have occurred since the company filed its 10-K with the SEC on Feb. 29 include the following:

• On March 1, Ultra entered into the waiver agreements with the lenders and unsecured senior noteholders;

• On March 1, the company elected not to make a $62 million principal payment due under the unsecured senior notes issued by Ultra Resources, Inc.;

• On March 1, Ultra elected not to make a $40 million interest payment due on unsecured senior notes issued by Ultra Resources;

• On March 8, Ultra received a letter from Sempra Rockies Marketing, LLC notifying the company that Sempra was exercising its alleged right to permanently recall the 50,000 MMBtu/day of capacity on the Rockies Express pipeline;

• On March 11, 16, 21, and 31, Ultra elected not to make a total of $2.7 million of interest payments due under due under its credit agreement;

• On March 15, Ultra delivered to the lenders an audit report that included an explanatory paragraph expressing uncertainty as to its ability to continue as a going concern;

• On March 15, the company received a notice from the New York Stock Exchange that it was not in compliance with continued listing standards, and, as a result, there is a significant risk that its common stock will be delisted from the NYSE;

• On March 28, Ultra received a letter from Rockies Express Pipeline notifying the company that its transportation agreement had terminated effective March 26 as a result of the alleged defaults under the terms of the Rockies Express tariff and the transportation agreement;

• On April 1, Ultra notified the lenders of the annual redetermination of the PV-9 value of its proved reserves. The company said Ultra Resources failed to comply with the PV-9 ratio covenant under the credit agreement;

• On April 1, 2016, the company elected to defer the interest payment on the 2024 notes;

• On April 4, Ultra received a demand for payment and notice of enforcement from Rockies Express related to the transportation agreement, under which Rockies Express demanded payment from $303.2 million by April 20; and

• On April 14, Rockies Express filed a lawsuit against Ultra alleging breach of contract and seeking damages related to the alleged breach. The company said it intends to defend this lawsuit vigorously.

Cost allocation issues

In addition, Ultra said it received a preliminary determination on April 19 from the Office of Natural Resources Revenue (ONRR) asserting that the company’s allocation of processing costs and plant fuel use at a specific processing plant were impermissibly allowed as deductions in the determination of royalties owed under federal oil and gas leases.

The ONRR unbundling review could ultimately result in an order for payment of additional royalties under the company’s federal oil and gas leases for current and previous periods.

The company said it plans to submit a response claiming the reasonableness of its allocation methodology.

Ultra Petroleum is a Houston-based independent exploration and production company.

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