CHK Chesapeake Energy Corporation

Wall Street debt investors have encircled a beleaguered oil producer founded by the late Aubrey McClendon and are in early talks to take control of it in a deal that could also take the company public, according to people familiar with the matter.

Such a deal, for Permian Resources LLC, w ould come in a hot market for shares of companies that drill in the Permian Basin region of West Texas and potentially head off a more contentious restructuring of the company, which credit-rating firms have said is likely to run out of cash by early next year barring a big rise in oil prices.

Among the firms that have gobbled up Permian Resources' discounted debt are Apollo Global Management LLC, Oaktree Capital Group LP, EIG Global Energy Partners, Ares Management LP and WL Ross & Co., the people said.

They are in talks with Permian Resources' owners, which include energy-focused private-equity firms Energy & Minerals Group and First Reserve Corp. as well as the estate of Mr. McClendon, t he energy titan who died in an early March car wreck in Oklahoma City.

The talks are nascent, the people cautioned, and may not lead to a deal.

A deal for Permian Resources would represent one of the first instances in the current commodities bust in which creditors gained control of a significant oil and gas producer. The talks also come as creditors tussle in Oklahoma City probate court over the web of assets and liabilities that Mr. McClendon left behind.

Among the possibilities discussed for Permian Resources, the people said, are swapping debt for equity and pursuing a public listing through a merger, potentially with a blank-check company, entities without assets that sell shares to raise cash for future acquisitions. A deal could also include an cash infusion from the company's current owners, creditors or someone else, they said.

The biggest oil bust in decades has made buying debt of distressed energy companies popular with big investors. Such situations often play out in one of two ways. If the indebted company rebounds, its bond prices rise. If it fails, the debt holder often has a claim on the company's assets.

So far, though, many companies have staved off serious entanglements with creditors by selling assets and new shares to raise cash.

Most of the more than 80 North American energy producers that have filed for bankruptcy since 2014 didn't have the prime drilling fields that Permian Resources owns, making it difficult for them to raise cash and making them less attractive to investors maneuvering to take over assets.

Mr. McClendon launched Permian Resources in 2014 after he was ousted from Chesapeake Energy Corp., the oil and gas giant he co-founded. Originally called American Energy-Permian Basin LLC, it was one of several oil and gas ventures the oilman started with Houston private investment firm Energy & Minerals Group.

EMG, which is led by John Raymond, the son of former Exxon Mobil Corp. chief Lee Raymond, and other investors bet big on Mr. McClendon's comeback, backing several new energy companies, including Permian Resources. Fueled by more than $15 billion of cash and debt raised from his backers, Mr. McClendon quickly got to work buying up swaths of drilling land around the country.

Permian Resources spent more than $3.6 billion acquiring properties in West Texas before oil prices plunged in late 2014, mostly with borrowed money, according to its public disclosures.

Though the company has nearly tripled its production, to the equivalent of about 28,000 barrels a day, oil's fall to about the half the $100 a barrel range at which it traded when Permian Resources got started has crimped the firm. It has restructured some debt, though it had to agree to a higher interest rate to do so, and said it bought back more than $200 million of bonds for 10 cents on the dollar earlier this year.

"Despite the debt reduction, we continue to view Permian Resources' leverage as unsustainable, and believe the company could face a liquidity shortfall next year, absent additional asset sales or an equity infusion," S&P Global Ratings analyst Carin Dehne-Kiley said in a May report.

Permian Resources carries about $2.4 billion of debt, some of which has recently traded at about 55 cents on the dollar, according to FactSet.

Fire-sale prices like that have enabled Wall Street firms to stake claim to drilling fields in the country's most prolific drilling region on the cheap. Stacked layers of energy-bearing rock help many Permian Basin wells produce oil in enough volume to make drilling worth the expense, even amid low crude prices.

EIG last year told investors that it had spent roughly $150 million buying Permian Resources' bonds at about 70% of their face value and had earmarked about $250 million more to keep buying them, according to documents from the Alaska Retirement Management Board, which invests with the firm.

(END) Dow Jones Newswires

July 12, 2016 13:25 ET (17:25 GMT)

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