By: Eric Chenoweth, Investment Manager and Legal Counsel at Bentham IMF
As the oil and gas industry continues to grapple with low energy prices, the recent collapse of a $2 billion energy-focused private equity fund has renewed concerns that the sector may face another round of corporate bankruptcies.
According to media reports, energy investment firm EnerVest Ltd. has seen its value plunge to nearly zero, which is a rarity for a billion-dollar-plus fund. EnerVest bought up oil and gas wells when prices were rising, peaking at $100 a barrel in 2014. But when those prices plunged – to a low of $26 a barrel last year – the value of the firm’s wells also plummeted. Those wells served as collateral and the falling value “triggered repayment demands from lenders that EnerVest could not meet,” per a report from CNBC.
EnerVest isn’t the only oil and gas player to use a debt-based strategy to make investments in recent years. While oil prices have bounced back to about $50 a barrel, CNBC opined that Enervest’s failure is “a troubling sign that other firms could yet face a reckoning after a three-year oil price downturn.”
For those companies, it’s a moment to ensure they are optimizing all their assets, including viable commercial litigation claims. Often, as companies face insolvency, they postpone pursuing litigation opportunities that could yield substantial recoveries or they overlook or undervalue their potential litigation assets. Understandably, bearing the cost of new litigation is generally not a priority at a financially troubled or insolvent company. And financial concerns can force companies into making choices that severely undervalue their potential claims, such as settling early for pennies on the dollar, hiring less-experienced counsel, or abandoning a case altogether.
Litigation financing allows an insolvent company to realize the full value of its potential claims by providing the resources to hire the appropriate counsel and to pursue a case to its conclusion. Bentham’s funding is non-recourse, which means it only receives a return on its investment if the case is successful, and thus, won’t increase the company’s debt load.
In bankruptcies where the estate has created a litigation trust to handle its claims, funding can also be used to provide a liquidity event on a successful or valuable litigation that is already ongoing.
In addition, a funder can provide trustees with greater confidence about the viability and proper valuation of the company’s claims. Claim valuation requires a deep understanding of the merits, the potential for success, and the recovery that may be achieved in a particular case. Bentham’s investment managers are experts in assessing the value and merits of claims. They conduct careful due diligence to determine which matters have the highest likelihood of success, so they can finance only the most valuable claims. Their interest in financing a case can give trustees and other stakeholders comfort that the trust is pursuing meritorious claims and attempting to achieve the maximum possible recovery.