Ultra Petroleum creditor, holdco trustee say valuation gives windfall to equity holders

New York, March 10 – Ultra Petroleum Corp. noteholder Cross Sound Management LLC said the company’s proposed implementation of its plan of reorganization includes a valuation process that will deliver an undeserved windfall to equity holders.

Cross Sound, which was joined on Friday in its protest by Delaware Trust Co. in its capacity as trustee for Ultra Petroleum’s 5¾% senior notes due 2018 and 6 1/8% senior notes due 2024, asked the court to instruct the company to carry out the plan in accordance with “its plain meaning,” according to a filing on Monday with the U.S. Bankruptcy Court for the Southern District of Texas.

At the center of the dispute is the question of whether Presidents’ Day should be included in the valuation process.

Under the plan, new equity in Ultra Petroleum Corp., the holdco, will be distributed to noteholders and equity holders based upon the settlement plan value.

The settlement plan value is based on the average of the closing 12-month forward Henry Hub natural gas strip price for the seven trading days preceding the commencement of a rights offering. The court has set Feb. 21 as the date for the start of the rights offering.

If the average strip price is in the range of $3.25 to $3.65 then the settlement plan value will be $6 billion, if it is below that range then the value is $5.5 billion and if it is above then the value will be $6.25 billion.

Cross Sound said it understands that the company has determined that the settlement plan value will be $6 billion.

But according to the creditor’s calculations, the average for the seven trading days was $3.21, leading to a plan value of $5.5 billion.

Cross Sound said that the company “appears” to have excluded Feb. 20, Presidents Day, from its calculation. It added that it uses the word “appears” because Ultra Petroleum has not disclosed how it determined the price.

“Although Presidents’ Day was not a ‘business day,’ it was a ‘trading day’: the New York Mercantile Exchange (‘Nymex’) was open for energy futures trading, and substantial trading of the Henry Hub natural gas futures contracts that comprise the 12-month forward strip price occurred on that day,” Cross Sound said in its filing.

“There was no ‘settlement price’ on Presidents’ Day – merely because it was not a business day and financial institutions were closed. There was, however, a ‘closing price’ for each of these contracts when trading ceased at 12:00 pm CT.”

Cross Sound further noted that the plan of reorganization uses the terms “trading day” and “closing price” and it was on that basis that creditors were asked to vote on the plan.

“A well-known canon of construction instructs that the plain and ordinary meaning of the words on the paper is the best evidence of intent. It is particularly important to apply that canon here,” Cross Sound added.

Cross Sound also noted that Ultra Petroleum is not in a position to “objectively decide this issue” because it is led by a management team owning a significant amount of equity.

Management and two ad hoc committees of noteholders collectively own approximately 60% of the shares, the creditor observed.

Based on its own calculations, Cross Sound said that use of the $6 billion value will produce a “windfall” of $300 million for equity holders, a transfer from holdco noteholders to holdco equityholders.

Delaware Trust, the trustee for the notes, said it agreed with Cross Sound.

But the ad hoc committee of holders of common stock said that Cross Sound is wrong and that it has a written statement from CME Group, Inc. that Presidents’ Day is not a trading day.

“Standing entirely on its own, the statement of the CME is a complete basis to overrule the objection,” the equity committee said in its response to Cross Sound, filed Friday with the court.

The committee also said that CME’s publicly available trading schedule states Presidents’ Day is not a trading day, that there was no close of the market between Sunday, Feb. 19 and Tuesday, Feb. 21 and therefore no closing price until Feb. 21. Other sources of information also do not report a closing price, it added.

The court should overrule Cross Sound’s objection and confirm the plan as it stands, the committee concluded.

Ultra Petroleum is a Houston-based independent exploration and production company. The company filed for bankruptcy on April 29, 2016 under Chapter 11 case number 16-32202.

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