BX Blackstone Inc

By Katy Stech 

Lawyers who put oil and gas producer Warren Resources Inc. into bankruptcy proceedings laid out plans at a Friday court hearing for the company to get a fresh financial start.

The Houston-based company said its executives have negotiated a $20 million bankruptcy loan so it can continue pulling natural gas from underground deposits in Pennsylvania and crude oil from the Los Angeles basin for Phillips 66 Co.'s refinery in Carson, Calif. Warren also drills for gas in Wyoming.

The company faces $545.2 million in debt, according to documents filed in U.S. Bankruptcy Court in Houston.

Warren Resources, however, won't need to spend that loan money right away because it negotiated to spend $10 million of cash in an otherwise-restricted bank account, officials told Judge Marvin Isgur at the hearing.

The consent to spend that restricted cash came from Blackstone Group's GSO Capital Partners, which would forgive $248 million it is owed for 82.5% ownership in Warren Resources under a restructuring proposal. Warren Resources would also emerge with a fresh $130 million loan from GSO Capital.

Lawyers for the company said the bankruptcy proceedings would wrap up by mid-September under the restructuring proposal, which still needs to be approved by Judge Isgur and creditors who have the power to vote.

The untouched bankruptcy loan and quick timeline drew criticism from Claren Road Asset Management LLC, a lower-ranking lender poised to get the remaining 17.5% ownership in Warren Resources as payback on its $167.3 million debt.

At Friday's hearing, Claren Road lawyer Kurt Mayr suggested Warren's unexpected bankruptcy filing and potentially quick restructuring would enable GSO Capital to take over the company before natural gas prices rebound and the company's value rises. "We can see why [GSO Capital] would like to have this case in and out of court while prices are low," Mr. Mayr said in court papers.

Allegations that energy companies have rushed through bankruptcy proceedings to the detriment of some groups of creditors and shareholders have been raised throughout the two-year energy-market downturn, showing how difficult it has been to predict the timing of an oil-price recovery.

Angry Magnum Hunter Resources Corp. shareholders who braced to recover no money from the Irving, Texas, oil and natural gas producer argued earlier this year that executives rushed that bankruptcy case. They noted natural gas prices rose after the Dec. 15 filing.

"[Magnum Hunter and lenders poised to take over ownership] have incentive to undervalue the company so that they can benefit from any future rebound in commodities prices," a group of shareholders wrote in a February 25 letter. A bankruptcy judge favored Magnum Hunter's plan, calling the outcome for shareholders "unfortunate."

Meanwhile, Warren Resources officials said they needed the restricted cash to pay for operations and vouched for the company's hardship during Friday's hearing. In court papers, they said oil and gas sales fell to $83.7 million last year, a 42% decrease compared to 2014. Amid the trouble, Warren Resources failed to make a $7.5 million payment to bondholders on Feb. 1.

"There remains great uncertainty in the oil and gas market, with a number of industry experts predicting continued depressed prices throughout 2016," Chief Executive Officer James Watt said in court papers.

Like Magnum Hunter's bankruptcy plan, Warren Resources' deal wouldn't provide any payout to shareholders.

Warren Resource's shares trade publicly on Nasdaq under the WRES symbol. As of April 30, the company had issued 85,250,025 shares of common stock.

Write to Katy Stech at katherine.stech@wsj.com

(END) Dow Jones Newswires

June 03, 2016 18:44 ET (22:44 GMT)

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