Category Archives: Oilfield Services

McDermott seeks large bonuses for senior management while in bankruptcy

Photo: Nandu Chitnis

McDermott has filed a motion with the Bankruptcy court seeking approval for an employee retention plan for both senior executives and key employees who are not executives. CEO David Dickson could receive $6.3 million in 2020 if the company hits its targets.



As a reminder, the company, which is based in west Houston, awarded Mr Dickson a $3.375 million cash retention bonus only last October. The company filed for Chapter 11 bankruptcy in January 2020, at which point the company paid out the last 30% of that award, even though it wasn’t technically earned.

Quarterly retention bonuses

The retention bonuses will be paid quarterly in cash. The senior executives and their target bonuses are as follows;

  • David Dickson (CEO) – $6.3 million
  • Chris Krummel (CFO) – $1.2 million
  • John Freeman (Chief Legal Officer) – $1.1 million
  • Samik Mukherjee (COO) – $1.3 million
  • Ian Prescott (Senior VP, Asia Pacific) – $423,000

The bonuses are dependent on the following performance metric;

  • Adjusted EBITDA  (27.5%)
  • Available cash balance (27.5%)
  • Technology Business sale proceeds (15%)
  • Safety (15%)
  • Achievement targets (15%)

The maximum payout is 200% of target, so Dickson could get $12.6 million.

The incentive scheme runs until the end of 2020, irrespective of whether McDermott exits Chapter 11 before then.

In October 2019, senior management got $7 million in bonuses

Freeman, Mukherjee and Prescott also got retention bonuses in October, similar to the targets above. Then-CFO Stuart Spence got $1.3 million, only to leave the company two weeks later. He got to keep his bonus, of course. If Mr Krummel got a bonus at that time, it wasn’t disclosed.

What’s particularly galling to me, is that, in October, when McDermott got their expensive financing and gave out the retention bonuses, the company was forecasting adjusted EBITDA for 2019 of $474 million. By the time they filed for bankruptcy three months later, that figure had been reduced to $183 million. They did meet their 2019 free cash flow forecast – an outflow of $1.2 billion – but only because they held back $300 million in payments to vendors.

There’s no real details on the key employees scheme, other than payments will be in fixed amounts, paid quarterly.

[UPDATE 02-16-20 Having reviewed the document filed with the bankruptcy court there are 13 employees in the senior executive plan. In the key employee plan there are 1,112 employees expected to receive a retention bonus worth a total of $79.4 million, an average of $71,403 each].

A reminder of how the company got into this mess

The bankruptcy stems from McDermott’s disastrous acquisition of fellow Houston company, CB&I in May 2018 for $4.1 billion ($2.4 billion cash, $1.7 billion stock). CB&I had a lot of legacy Engineering & Construction projects that have turned out to be much less profitable than McDermott expected at acquisition.

The costs to complete estimated at acquisition on just 3 projects (Cameron LNG, Freeport LNG and Calpine Power) increased by over $1 billion. As a result, the goodwill on CB&I ended up being $4.8 billion. McDermott wrote down $2.1 billion in goodwill 7 months after acquisition. That’s a quick destruction of shareholder value!

After the deal closed, Mr Dickson received a 25% increase in base salary to $1.125 million and a $1.125 cash bonus for completing the acquisition.

SEC filing – McDermott bankruptcy bonuses

20-30336 doc 367 – McDermott incentive scheme filed with Bankruptcy court

Seismic company states that former management misappropriated nearly $17 million

SAExploration Holdings has restated its annual report for 2018 and selected financial data going back to 2014. As a result, at December 31, 2018, stockholders’ equity swung from equity of $15.4 million, as originally reported, to a deficit of $17.4 million!



Furthermore, the company states that former CEO Jeff Hastings and former CFO Brent Whiteley misappropriated $16.6 million between 2012 and 2019. Not surprisingly, the company stated that the Securities and Exchange Commission and the Department of Justice are conducting parallel investigations.

SAEX is a global provider of seismic data and processing services. It has its head office in west Houston. It currently has a market capitalization of $13 million.

At some point in 2019, the SEC started an investigation in relation to revenue recognition, accounts receivable and tax credits. In August 2019, the Board established a special committee of independent directors to oversee an external investigation with respect to the matter.

Vendor and customer secretly controlled by CEO and CFO

The special committee identified that Global Equipment Solutions, one of the company’s vendors in 2015 and 2016, was actually formed by Brent Whiteley and controlled by Mr Whiteley and/or Mr Hastings. The company paid $12 million to this entity in these two years.  $5.9 million of this ended up being a capital contribution to a company called ASV. The company had originally recorded third party revenue from ASV in 2015 and 2016 of $84 million and $57 million respectively.

In the original 10-k filing, nearly all of that revenue from ASV in 2016 was still outstanding as a receivable in 2018. There was also a convoluted explanation about how the customer – ASV wasn’t named in the 2018 financial statements – was going to pay SAEX using monetization of exploration tax credits from the state of Alaska. That got the attention of the SEC. In the restated financials, this receivable was written off and ASV has been consolidated as a variable interest entity.

Consulting firm secretly controlled by CFO

Furthermore, from 2012 to 2019, payments of $4.1 million were made to a company called RVI Consulting. This was secretly controlled by Mr Whiteley. The payments were originally recorded as legal and professional expenses.

The special committee also identified the misappropriation of $0.5 million in 2013 in relation to the reimbursement of the individual tax liability of Mr Hastings.

In total, the amount of funds that the company states was misappropriated was $16.6 million ($12+$4.1+$0.5 million).

The company fired Mr Whiteley in August 2019. It suspended Mr Hastings on the same day and terminated him in November 2019.

The aftermath

The company has spent $6.9 million in legal and professional fees in relation to the SEC investigation in the nine months ended September 30, 2019. For good measure, the Alaskan Department of Revenue is also conducting an investigation into the issuance of tax credits and may impose its own sanctions.

The company has been selling off assets to try and improve its financial situation. In November it sold its assets in Australia for $9 million. In January, 2020 it sold certain seismic data assets for $15 million plus a possible earnout of $5 million.

At September 2019, the company had debt of $119 million and negative equity of $31 million.

https://www.sec.gov/Archives/edgar/data/1514732/000156459020003869/0001564590-20-003869-index.htm

Two Houston residents sentenced in ‘Pump and Dump’ Securities Fraud

Two Houston-area residents have been sentenced for their role in a $40 million ‘Pump and Dump’ securities fraud. John Brotherton of League City was sentenced to 60 months while Charles Grob received a sentence of 12 months.




Brotherton and Grob were also ordered to forfeit $1.9 million and $242,907 respectively, and serve three years of supervised release following their sentences. The court also ordered each man to pay restitution to the victims of the fraud. The amount will be determined at a later date.

Brotherton pleaded guilty in February 2019, while Gobb admitted his guilt in December 2018.

Five others – Andrew Ian Farmer, 41, Thomas Galen Massey, 49, Eddie Douglas Austin Jr., 69, and Carolyn Price Austin 65, all of Houston; and Scott Russell Sieck, 61, of Winter Park, Florida, also pleaded guilty for their respective roles in 2018 and will be sentenced later this year.

Chimera Energy

The original indictment involved the stock of a Houston oilfield services company called Chimera Energy Corp. In the summer of 2011, Farmer met Grob and Mr Grob agreed to become the CEO. Chimera was incorporated and a sham Initial Public Offering was conducted in December 2011 and January 2012.

Farmer and his associates recruited individuals to act as straw investors in the IPO which, in total, raised $75,000.  In correspondence with the FINRA regulator, Farmer concealed the extent of his involvement and got clearance from a broker-dealer to publish quotations for the stock. Farmer then got the straw investors to transfer their stock to entities he controlled.

During 2012, Farmer issued fake press releases touting cutting edge technologies in ‘NEW SAFE FRACKING that uses ZERO WATER’.  The share price rose to a high of $1.55 and Farmer sold 6 million shares for $4.6 million. The SEC suspended trading in October 2012 and announced initial charges in 2014.

Superseding indictment

A superseding indictment was filed in July 2017 which accused the defendants of ‘pump and dump’ schemes in 11 other penny stocks. Those schemes operated between September 2011 and June 2016 and caused losses of $40 million.

Brotherton participated in “war room” strategy meetings during which he and others formulated the “story arcs” for the various Issuers. He also coordinated promotions for the Group’s pump-and-dump schemes through late 2013. Brotherton later rejoined the Group’s scheme in 2015 in which he assisted in formulating promotional strategies and received distributions of illicit stock sale proceeds.

https://www.justice.gov/usao-sdtx/pr/two-sentenced-securities-fraud-conspiracy

Indictment – Farmer et al

Houston oilfield services company going dark

Parker Drilling (market cap $270 million) will voluntary delist its common stock from trading on the New York Stock Exchange, effective February 10, 2020. This is commonly referred to as ‘going dark’.



The company has annual revenues of $600 million and provides drilling services worldwide, using both company-owned and customer-owned rigs. It also has a rental tools division.

The company was formed in 1934 in Tulsa. It went public in 1978 and moved its head office to Houston in 2001. In December 2018, the company entered bankruptcy proceedings. At that time the shares were delisted from the NYSE.

Chapter 11 resulted in debt being reduced from $585 million to $210 million, with the bondholders gaining a controlling equity stake. Existing shareholders ended up owning only a small fraction of the new equity. After the company came out of bankruptcy in March 2019, the company’s shares regained their listing on the NYSE.

The company has now elected to buy out the small shareholders to get its number of stock holders below 300. Below that level, the company is not required to file public reports with the SEC. By delisting the company expects to save $800,000 per year.

The company is currently without a CEO. Back in July 2019, the company announced it was parting with longtime CEO, Gary Rich, at the end of 2019. Mr Rich received a cash severance of $1.5 million (1x base salary and target bonus). At the time of the announcement, the company said it would engage a search firm to find a successor. No successor has yet been named.

SEC filing – Parker Drilling delisting

 

Bryan bookkeeper charged with using company card for $850k personal use

James Day Burke, a bookkeeper with Rustex Inc, has been charged with using company credit cards for his own personal use. He was employed at the company from 2010 through August 2018. The fraud allegedly took place throughout the whole of that time.



Rustex is a small oilfield services company involved in the construction and maintenance of natural gas plants. It is based in Bryan, TX. It used Quickbooks for its accounting records.

Mr Burke charged expenses to the company credit cards and was responsible for paying the credit card issuers from the company bank account.

The information charge sheet alleges that Mr Burke stole $855,872.43 from Rustex. However, only one specific instance is identified in the information sheet, namely a $1,954 dental bill in August 2015.

If convicted, Mr Burke faces a possible sentence of up to 20 years in federal prison and a $250,000 maximum fine.

https://www.justice.gov/usao-sdtx/pr/former-oil-and-gas-employee-charged-using-company-card-850k-personal-use

Oilfield services company agrees to out-of-court restructuring plan

Photo by Joshua Doubek

Key Energy Services has agreed to an out-of-court restructuring plan. The plan, which has the approval of 99.5% of the supporting lenders involves;

  • converting $242 million of debt into 97% of newly-issued equity.
  • $20 million of term loans under a new $51 million term loan facility.
  • holders of existing equity getting 3% of the newly-issued equity.
  • adoption of a new management incentive plan representing up to 9% of the company’s outstanding shares.



Key operates the largest well service rig fleet in the US. It also provides fishing and rental tools, coiled tubing and fluid management services. It is based in downtown Houston.

For the nine months ended September 2019, the company had revenues of $329 million and a net loss of $67 million.

Back in November, I posted that Key had elected not to pay interest on its term loan. Shortly after that, the shares were delisted on the NYSE.

Key originally entered into a pre-packaged bankruptcy agreement in October 2016. As part of that deal, its $1 billion of debt was reduced to a $250 million term loan (with a 12% interest rate). The company exited Chapter 11 in December 2016 with $252 million in equity. At the end of September 2019, the company had negative equity of $18 million.

In other words, its rushed Chapter 11 reorganization was not well thought-out as the company managed to blow through $280 million in equity while barely making a dent in its debt.

The restructuring is expected to be completed by the end of February.

SEC filing – Key Energy restructuring

 

 

Houston helicopter companies to merge in all-stock transaction

ERA Group and Bristow Helicopter have announced that they will merge in an all-stock transaction. Both companies have their head office in west Houston.



ERA is publicly-traded and has a market capitalization of $183 million. Bristow was publicly-traded until it entered Chapter 11 bankruptcy in 2019. The terms of the merger are that existing Bristow shareholders will get 77% of the combined company, while ERA shareholders will get 23%. The combined company will be renamed Bristow.

ERA CEO Chris Bradshaw will become the CEO. However, the rest of the management team will be named later. The current CFO of ERA is Jennifer Whalen, who has been in that role since June 2017. For Bristow, it is Brian Allman who was promoted to the role in March 2019. Mr Allman replaced Don Miller who was promoted to the CEO role of Bristow. No word yet on what role Mr Miller will have post-merger.

The companies expect to achieve $35 million in cost savings through the elimination of duplicate corporate expenses and the optimization of aircraft maintenance and fleet utilization.

Bristow filed for bankruptcy in May 2019 and exited in October. Existing shareholders were wiped out and the bondholders took over the company.  Debts of $1.7 billion were reduced by $900 million. The filing was somewhat controversial as some shareholders argued that Bristow should not have been put into bankruptcy as the equity still had value.

The transaction is expected to close in the second half of 2020. If shareholders of one of the companies votes down the deal, there will be a $9 million break-up payable to the other party.

SEC filing – ERA – Bristow merger

McDermott files for bankruptcy – Management cashes in

Photo: Nandu Chitnis

McDermott International has filed for a pre-packaged Chapter 11 bankruptcy after months of deteriorating business prospects.



The key highlights of the restructuring are;

  • elimination of $4.6 billion of debt. The secured lenders will get 94% of the new equity, unsecured bondholders the remaining 6%.
  • Unsecured trade creditors will be paid in full
  • Existing shareholders are wiped out
  • Lummus to be sold for $2.725 billion

However, worry not, the senior management have looked after themselves. Back in October McDermott announced they had obtained $1.7 billion in additional new financing (at 12% interest rates).

At the same time, the senior management were awarded large retention bonuses. David Dickson, CEO, got $3.375 million. Samik Mukherjee, COO (the one who acknowledged taking TechnipFMC trade secrets) got $1.4 million. The funding and the bonuses were to be paid in tranches. So far, two-thirds of the bonus have already been paid out. The Board of Directors have decided to pay the remaining one third to Dickson and Mukherjee as a gesture of ‘good faith’ even though Tranche C of that financing agreement never got paid.

CFO Stuart Spence resigned in November. He got to keep all his retention bonus of $1.3 million.

Business prospects have deteriorated considerably in the second half of 2019 due to the uncertainties surrounding the company. Bookings were only $3 billion in the second half, versus $14 billion in the first half. Customers have canceled contracts or placed McDermott on the disqualified to bid list. Vendors have placed liens and withdrawn from job sites.

 

https://www.prnewswire.com/news-releases/mcdermott-international-inc-announces-comprehensive-prepackaged-restructuring-transaction-to-de-lever-balance-sheet-and-immediately-position-company-for-long-term-growth-300990241.html

CFO at seismic company steps down

Steve Bate, the CFO at ION Geophysical, will be stepping down from the CFO role, effective February 1. Mike Morrison, currently VP of Finance and Treasurer, will become the interim CFO. Mr Morrison has been with ION for 17 years.



ION Geophysical provides seismic services to the oil and gas industry and has its head office in west Houston. It has a market capitalization of $126 million.

Mr Bate joined ION in 2005 and became CFO in 2014. After stepping down as CFO, he will remain with the company as Strategic Advisor to the CEO until the end of June.

Mr Bate will receive a severance payment of $750,000, which is two times base salary. Of this, $187,500 will be paid in January 2021, the rest will be paid over 18 months, starting in January 2021. He will also receive a one-time payment of $281,250, representing his 2019 target bonus. This will be paid by February 2020.

In addition, 89,430 shares of restricted stock will become fully vested. This is worth about $0.5 million.

In June, former CEO Brian Hanson left the company with a large severance package. He was replaced by Chris Usher, VP of Operations Optimization.

https://www.prnewswire.com/news-releases/ion-announces-cfo-transition-300979596.html

 

Almost bankrupt Oilfield Services company gives CEO $2.5m severance

Key Energy Services has announced the departure of CEO Robert Saltiel and the appointment of CFO Marshall Dodson as the interim CEO.

Back in November, Key missed an interest payment on its $250 million term loan as it considered strategic alternatives. Its shares were delisted on November 27 at 27 cents per share, giving it a market capitalization of $2.64 million.



Mr Saltiel only joined Key in August 2018. He had a base salary of $800,000 and will receive a cash severance of $2.5 million. This is due to be paid on January 10, 2020. The $2.5 million is actually less than he was entitled to under his employment agreement ($3.4 million). That stipulated he would receive 2x base salary plus target bonus (1x salary). In February 2019, the board also granted him a $1 million long-term cash incentive award that would have started vesting in February 2020. Upon termination, the award vests immediately.

It appears that the company is trying to renegotiate a debt restructuring outside of Chapter 11. However, if the company does file for bankruptcy before January 10, the payment likely won’t be made. Even if Key files after January 10, the payment could be clawed back from Mr Saltiel if it is deemed a preferential payment under the bankruptcy code.

Mr Dodson will receive an increase in his base salary from $425,000 to $575,000 while being the interim CEO. If Mr Dodson is not appointed CEO, he will be entitled to receive an acceleration of his retention bonus that was granted in July 2018. Currently, the remaining 75% or $478,125 will vest in July 2020.

SEC filing – Key Energy CEO departure