Steffy: Failure can really pay for these executives

What’s the price of failure? If you’re an executive at ATP Oil & Gas, it’s about five times the price of success.

The bankrupt Houston company at the end of last year awarded hundreds of thousands of dollars in bonuses to top executives – members of the same management team that put the company in bankruptcy back in August.

Yet for all that pay, ATP remains a muddled mess and creditors paint a picture of a management team that has consistently overspent and under-delivered. As a result, ATP’s reorganization in bankruptcy grows more unlikely by the day.

ATP is one of the smallest companies drilling in the deep waters of the Gulf of Mexico. In filing for Chapter 11, it claimed it was a victim of the federal drilling moratorium enacted after 2010′s Deepwater Horizon disaster, and it’s been struggling to finance its operations ever since.

Compared with the company’s $3.5 billion in liabilities, the executives’ bonuses are tiny. Four of ATP’s six top managers got about $762,000 at year’s end, according to financial statements filed with the bankruptcy court.

The company’s total pay to the six top executives jumped to almost $913,000 for December from $159,194 in previous months.

But the bonuses speak to the tone of the entire bankruptcy. It’s unfathomable that executives who have made such a hash of things would believe they deserve a reward under any circumstances, let alone those in which ATP and its creditors now find themselves.

Creditors

As if to underscore that point, the committee representing unsecured creditors in the bankruptcy filed a tersely worded document with the bankruptcy court in Houston on Tuesday objecting to ATP’s latest attempt to line up financing.

The creditors claim the financing terms are so onerous that they benefit the lenders at the expense of creditors.

After three previous financing deals fell through, “the debtor returns with a new financing proposal intended to prop up its estate just long enough to liquidate its assets solely for the benefit of the … lenders,” the filing said.

The fourth proposal is “the latest turn on an unfortunate path that the debtor has chosen and which has burdened the debtor’s unsecured creditors with unprecedented expenses.”

Management has consistently failed to meet performance targets and “there is nothing with respect to this latest round of financing that could lead anyone to believe that management now has it right,” the creditors committee said.

ATP’s bankruptcy attorney and its chief executive, Paul Buhlman, didn’t return my phone calls seeking comment before my deadline.

Objection

In its objection, the creditors committee called for a bankruptcy trustee to manage the company’s finances.

The committee acknowledged that if the judge upholds its objection to the financing, ATP may be forced into a Chapter 7 liquidation. While that would be “far from desirable for all stakeholders,” it would be preferable to approving the latest financing proposal, the filing said.

“They’re saying, ‘You’re completely disenfranchising us,’?” said Wayne Kitchens, a bankruptcy attorney with Hughes Watters Askanase in Houston who has reviewed the case but isn’t involved in it.

ATP is trying to sell some offshore properties, but potential buyers are likely to be scared off by the financial commitments that encumber them. What’s more, almost three-fourths of ATP’s proved reserves are undeveloped. That means a buyer would have to start spending to develop the property to realize any return.

Blaming moratorium

For more than two years, ATP has attempted to blame the five-month Gulf drilling moratorium for all its problems. It even joined in a lawsuit against the government, arguing that the moratorium was unlawful.

Blaming the moratorium was a convenient excuse, but ATP’s real problem was debt. At the time it filed for bankruptcy, its debt far surpassed its market value of $380 million.

The most likely conclusion to the ATP case is that the secured creditors will take over the company, inject new capital and bring in a new management team.

It’s not clear how much the unsecured creditors are likely to recover in that process, but the last few months have left the company with few options.

Meanwhile, the current management team hasn’t proved itself any better at running things in bankruptcy than it did out of bankruptcy. All it’s done is raised the price of failure.