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Memorial Production Partners to File Bankruptcy: Key Highlights

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Why bankruptcy?

Memorial Production Partners (MEMP), an upstream MLP that was suffering from a liquidity crisis and high leverage, has entered into a Plan Support Agreement, or financial restructuring, with its senior secured note holders. MEMP expects to eliminate $1.3 billion of debt from its balance sheet after restructuring.

According to MEMP, the partnership wants to “file for reorganization under Chapter 11 of the United States Bankruptcy Code in the coming weeks” to implement the restructuring process. It will mark the third big bankruptcy filing by an upstream MLP in 2016. Linn Energy and Breitburn Energy Partners declared bankruptcy in the first half of 2016.

Memorial Production Partners joined dozens of other upstream producers that have filed for bankruptcy since the rout in energy prices. We’ll look at the reasons for Memorial Production’s failure in the next part of this series.

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Market reaction

Memorial Production Partners’ shares fell 56.0% after the bankruptcy announcement. MEMP’s peers Vanguard Natural Resources (VNR), Legacy Reserves (LGCY), and EV Energy Partners (EVEP) rose 3.5%, 0.90%, and 0.50%, respectively.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks US upstream companies, closed 0.30% higher on Friday, December 23, 2016.

Memorial Production Partners’ bankruptcy shouldn’t come as a surprise to its investors, since the company has been battling a weak liquidity position for quite some time. The partnership earlier entered into a forbearance agreement with noteholders “to forbear from exercising any and all remedies available to them as a result of MEMP’s previously announced election to not make an interest payment of approximately $24.6 million due on the 2021 notes,” as noted in a December 19, 2016, company press release.

Management commentary

On MEMP’s restructuring, CEO (chief executive officer) William J. Scarff said, “Today’s announcement highlights the next step in our efforts to reduce debt and position the Partnership for the long-term. After thoroughly considering all options with the assistance of our legal and financial advisors, and in light of the challenging commodity pricing environment and the recent reduction of our borrowing base, we believe that this course of action is in the best interests of MEMP.”

MEMP expects its operations to continue without interruption during the restructuring process.

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