Energy XXI Ltd filed for bankruptcy this week, the latest victim of low oil prices. There have already been almost 60 oil and gas companies that have filed for bankruptcy since the summer of 2014 with more surely to come. Everyone in the energy and securities industries knows that oil and gas prices are extremely volatile. That didn’t stop a number of unscrupulous stockbrokers from hawking shale bonds – bonds that relied on high oil prices.
Energy XXI is one of the largest shallow water drilling companies in the Gulf of Mexico. Already two other energy companies defaulted this month.
Energy XXI is asking the court to convert about $2.8 billion in debt into stock. Many of the bondholders will be forced to accept warrants that can be later exchanged into stock. Overnight, almost $3 billion in debt will be wiped out. Bondholders no longer will be in first position.
In addition to the secured bonds, the company also carried a significant amount of unsecured debt. In a bankruptcy filing, the company said this about the unsecured debt:
“It is not possible to predict what value, if any, Energy XXI unsecured bonds may ultimately have. We will not pay interest on the unsecured bonds or the secured second lien bonds, and interest will not accrue on the bonds during the financial restructuring process.”
Other Shale Bond – Energy Companies in Trouble
Energy XXI isn’t the only energy company facing difficulty this month. Earlier this month Linn Energy missed a bond payment and Peabody Energy also filed for bankruptcy. That brings the default tally so far this month to $14 billion.
There is nothing wrong with selling shale bonds but stockbrokers have an obligation to make sure they are “suitable” for their investors. Because they are so volatile, they should never be marketed to retirees and those who want stability or are looking for conservative investments.
Unfortunately, when shale mania struck the country several years ago, some brokers threw caution to the wind and pushed these bonds on anyone with a checkbook.
Brokers also have an obligation to insure that their customers fully understand the risks of what they are recommending. We have spoken to many people – particularly the elderly – who say that they were promised high returns and safety.
Although oil prices have rallied a bit in recent weeks, they are still far below the $60 dollar per barrel figure that most companies need to break even. The prolonged slump in prices, which began in 2014, has forced many companies to seek bankruptcy protection. Those that are still operating have seen their bonds reduced to junk status.
The rating agency Fitch says that many exploration and production company bonds (shale bonds) are rated B- or lower and of those, more than half of those have bids of less than 50 cents on the dollar. To investors needing money to retire, those figures are devastating.
Stockbrokers Responsible for Shale Bond Losses
Investors who were misled by their stockbroker or other investment professional may have recourse. Most bad investment advice claims and those involving “suitability” can be resolved by binding arbitration before the Financial Industry Regulatory Authority – FINRA. Brokers can be forced to arbitrate and the claims are generally resolved in 14 months or less.
Better yet, even if the broker is now out of the securities’ business or is broke, his or her employer can be held responsible for the losses. Don’t rely on brokers who claim you should “wait it out,” take action today. The time to bring claims against stockbrokers is limited. Some brokers will string their clients along hoping to get beyond the statute of limitations when it becomes too late to file a claim.
For more information, visit our shale bond claims page. Ready to see if you have a case? Contact attorney Brian Mahany at or by telephone at (direct). The call is free, there is no obligation and most cases can be handled on a contingent fee basis. If you don’t win, we don’t get paid.
MahanyLaw – America’s Stockbroker Fraud and Fraud Recovery Lawyers