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5 Keys to a Successful Chapter 11 Plan of Reorganization


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Your client has achieved a major milestone thanks to your help: the plan of reorganization has been approved by the unsecured creditors and confirmed by the judge. As bankruptcy counsel you should feel good. Your job is basically done until the time comes, if ever, for the case to be dismissed. But do you have a sense of unease? Can these guys really pull it off? Will they make the same mistakes that landed them in Bankruptcy court this time? Will they make other, perhaps worse mistakes in the future?

These are valid concerns and are intended to be handled in the plan negotiation. Indeed, the parties asked to take a haircut certainly will be asking these questions and any new capital source will closely scrutinize the plan. But there is more to achieving a good outcome than what most Disclosure Statements usually address.

While this post and accompanying white paper may prove helpful, they are only a starting point. The hope and expectation is that we will have a discussion with many contributors offering suggestions and critiques, all with the goal of furthering the chances of successful Chapter 11 reorganizations.

The reality is that few debtors survive bankruptcy to become successful businesses. Certain large, high profile cases such as Texaco, General Motors and United Airlines do emerge, but generally as a weaker competitor. Texaco was acquired by Chevron, United merged with Continental and GM is at this time, a vulnerable takeover target. The fate for smaller businesses is worse.

There are steps that can be taken to ensure business success. Successful businesses all have one characteristic in common: alignment of three key elements or pillars;

•             People

•             Strategy

•             Business Processes

Bankruptcy counsel is in a unique position to influence the outcome, for the better. Your clients look to you for all manner of advice, both legal and business. You have the credibility to influence your client, whether the debtor, competing plan sponsor or even a creditor to make sound preparations in the “sturm und drang” of bankruptcy proceedings.

The 5 Keys

The odds of survival under low oil and gas prices can be improved. Critical to that success is making some fundamental changes in the way the company conducts its business. It is not magic and does not depend on Mr. Wizard sweeping in with a secret solution. Long-term business success, whether in a mature company, a start-up or a start-over is grounded in planning and executing the fundamentals well.

There are 5 key features critical to building a successful business plan.

  1. Understand what’s not working

Businesses failure is frequently due to a weakness of one or more of the three pillars. But more often, when businesses fail it is due to misalignment of all three. A company emerging from bankruptcy is vulnerable to external threats. Internal weaknesses could preclude survival. While some actions can and should be taken to deal with competitive threats and market forces, senior leadership has much greater control over the internals. Indeed, good alignment is the best way to build and sustain competitive advantage.

  1. The Right People in the Right Seats

E&P entrepreneurs are usually highly skilled technically. Not so common are good, let alone great leaders. Without good leadership company resources cannot be correctly applied. Indeed one could argue that poor leadership is the single most important root cause of business failure.

  1. A Sound Strategic Plan

There are a lot of great opportunities to chase and a strong temptation to chase deals where there is inadequate knowledge. Except for the major International Oil Companies (IOC) most upstream companies should have a tightly focused strategy based upon a few geologic models in a confined geography. Alternatively, a single model applied to a few geographic areas also works. The notion of diversification is a fool’s choice. The assumptions underlying the plan need to be carefully examined and reviewed and perhaps challenged frequently. While it should be focused, it must be flexible to adapt to changing circumstances. Finally, it must be driven by SMART Goals. Specific, Measurabel, Achievable, Realistic and Timely.

  1. Effective Business Processes

Frequently the business processes are defined by the words “exploration” and “production” with emphasis on the technical skills underlying those two terms. The technical processes are, of course, critical and of paramount concern to the senior leaders. But business processes are at once separate and intertwined with the technical. They support the overall mission and when done right, integrate into a seamless unified progression resulting ultimately in a successful business. In good times, there may be a temptation to become enamored with a geologic concept. But this enthusiasm has to be tempered by economic reality. Basically, what is the breakeven commodity price required for both return of and return on capital? That answer is critically dependent on several critical business processes: Capital Allocation, Capital Deployment, Overhead Discipline and operating cost control.

  1. Culture, the final frontier

Often culture is dismissed as “soft”, devoid of value and can’t be measured in any event. None of it is true. Like the stuff on an old piece of cheese, culture in an organization will grow. Whether it is good is a matter of intention. If left on its own a toxic culture is likely to develop. Therefore it should warrant attention. Here are the key elements of a culture that will increase the odds of aligning people, strategy and process.

  • Quality Decision Making
  • Collaboration
  • Freedom to Challenge
  • Eliminate Politics
  • Efficiency and Effectiveness
  • Learning and Leveraging
  • Excellence, Not perfection
  • Back Stop

A company that can adapt and adopt these key elements has a better chance of avoiding Chapter 22 than one that maintains failed its ways of doing business.

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