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EV Energy Investors Seek Appointment of Ch. 11 Examiner

A pair of equityholders of bankrupt oil and gas producer EV Energy Partners LP asked a Delaware bankruptcy judge Monday to appoint an examiner in the case to look into potential prepetition transactions that allegedly stripped the debtor of value.

In their motion for an examiner, equityholders Jerry Roger Kent and Selma Poznanovich — who hold 2.5 million shares worth about 5 percent of EV Energy — said related-party transactions that occurred before the debtor’s bankruptcy filing last month shifted value away from investors and toward unsecured noteholders.

The prepackaged plan of reorganization filed by EV Energy will extinguish existing equity, and unsecured noteholders will receive 95 percent of the new equity in a reorganized company. The existing equityholders will receive the remaining 5 percent, the motion said.

“While this result may appear normal or even positive in other cases, here, the debtors’ value has been grossly underreported and there are significant questions regarding prepetition, related-party transfers that must be investigated,” the motion said.

Allowing confirmation of the proposed Chapter 11 plan to go forward on an expedited basis as requested by EV Energy would be improper, the motion said, without providing for an independent investigation of the allegations put forth in the motion.

Kent and Poznanovich seek information about the value of the debtor, the shifting of value away from equityholders, the terms of a $2.66 billion sale of assets by EV Energy’s parent company, other transactions involving the debtor and its parent company and potential failures to make required reporting to the U.S. Securities and Exchange Commission.

The equityholders argue that because the United States Trustee has not formed a committee of unsecured creditors or a committee of equityholders in the case, there is not independent voice to investigate the transactions cited by Kent and Poznanovich in the motion.

In the same vein, the equity holders suggest that no independent valuation has been conducted on EV Energy’s assets and the fairness opinion provided by the debtor’s financial adviser Perella Weinberg Partners LP is insufficient because it relies on financial statements provided by the debtor.

According to the motion, EV Energy provided a value of its oil and gas assets of $1.5 billion in December 2016 and a value of $1.375 billion in December 2017. Now, less than six months later, the equityholders say the debtor has listed a mid-range equity value of $220 million for its assets post-reorganization.

Kent and Poznanovich say there may be issues in relying on the carrying value analysis, but that the stark disparity in valuation merits inquiry, especially in light of the $2.66 billion sale of assets by EV Energy parent EnerVest Ltd. to Magnolia Oil & Gas Corp., a new entity formed by TPG Pace Energy Holdings Corp.

“Without independent analysis and market testing, the value proffered by the debtors is unsupported,” the motion said. “An independent examiner would be well-positioned to review these disparities and the circumstances surrounding the earlier disclosures, and determine whether there are material omissions or inaccuracies impacting the suggested valuation.”

The EnerVest-Magnolia tie-up would leave EnerVest shareholders with a 51 percent stake in the new entity, which would be a large-scale pure-play operator in the Eagle Ford and Austin Chalk formations of South Texas, according to the motion. However, EV Energy’s assets in those formations were not included in the Magnolia deal and came with a noncompete clause that prevents EV Energy from competing with the new entity in those formations.

Representatives for EV Energy and the equityholders could not immediately be reached late Monday for comment.

EV Energy hit bankruptcy in early April after several years of depressed oil and gas prices led to a precipitous decline in revenue in 2015 and 2016. Though prices rebounded last year, EV Energy did not see a return to prior years’ cash flow sufficient to maintain its obligations under its secured credit facility and its unsecured notes, the company said in court filings.

Debtor attorneys said the prepackaged plan has received overwhelming support from creditors since the solicitation of votes began last month, including 100 percent of its secured creditors and 94 percent of its unsecured creditors. In addition to the noteholders swapping their debt for the bulk of the new equity, other unsecured claims will be paid in full under the plan.

The court has scheduled a May 15 combined hearing on the plan disclosure statement and confirmation.

The debtors are represented by Laura Davis Jones of Pachulski Stang Ziehl & Jones LLP and by Joshua A. Sussberg, Jeremy Evans, James H.M. Sprayregen, Brad Weiland and Travis M. Bayer of Kirkland & Ellis LLP.

The equity holders are represented by Stuart M. Brown, Derrick B. Fowler, Kaitlin MacKenzie Edelman, Jason Daniel Angelo, Eric Goldberg and David M. Riley of DLA Piper LLP.

The case is In re: EV Energy Partners LP et al., case number 18-10814, in the U.S. Bankruptcy Court for the District of Delaware.