By Andrew Scurria 

The judge overseeing EP Energy Corp.'s bankruptcy signed off Friday on a $3.3 billion debt-cutting plan, ruling against senior bondholders who said the drilling company's business projections are too optimistic.

Judge Marvin Isgur of the U.S. Bankruptcy Court in Houston said on Friday he would approve the restructuring proposal, which turns junior creditors Apollo Global Management Inc. and Elliott Management Corp. into controlling shareholders of EP Energy, the largest U.S. energy producer to file for chapter 11 protection since 2016.

The ruling followed a multi-day trial in which senior bondholders and other unhappy creditors challenged EP Energy's strategy and said the bankruptcy plan wasn't feasible. In part, they pointed to the recent coronavirus epidemic and its devastating impact on oil prices to argue that EP Energy was unlikely to meet financial projections once it exited bankruptcy.

Fidelity Management & Research Co., JPMorgan Chase & Co. and other senior bondholders also said they were being underpaid, demanding nearly $178 million in premium payments on top of $1 billion in bond principal. EP Energy's plan reinstates their debt claims, but without the extra premiums.

Judge Isgur said forcing EP Energy to pay the premiums would amount to a penalty on its decision to seek chapter 11 protection, "which is inconsistent with the public policy of the country, inconsistent with what everyone has assumed is true in bankruptcy."

"You can't unreasonably block somebody's ability to file for bankruptcy, " he said.

The judge also said EP Energy was likely to stay current on its debts or refinance them after leaving bankruptcy, despite the recent shocks to crude prices and the potential for a long-lasting oil slump.

Oil prices hit a 2 1/2 year-low on Friday, pushed down by market expectations that the coronavirus epidemic would sap global demand through the first half of 2020.

Already, worries about fallout from the coronavirus have pummeled energy stocks while investors try to gauge the magnitude of its impact on crude prices.

Avinash D'Souza, a banker advising EP Energy, testified in court that Covid-19, the respiratory disease caused by the new coronavirus, would likely have only a short-term impact on global economic output and oil prices.

Under the bankruptcy plan, Apollo, Elliott and other junior creditors are buying the bulk of EP Energy's equity through a $475 million rights offering composed of cash and the forgiveness of debt.

Senior bondholders said EP Energy's plan overvalued the company and left it burdened with too much debt in a weak commodity market.

Owners of oil-and-gas leases also opposed the proposal and accused the company of orchestrating a sweetheart deal with Apollo, which acquired junior bonds that are being traded for equity under the chapter 11 plan. The debt exchange allows Apollo to hang on to some of its stake in EP Energy, despite the bankruptcy.

In his ruling, Judge Isgur acknowledged that Apollo had bought EP Energy debt while the firm's executives were inside the energy company's boardroom. But there was nothing illegal about that, and EP Energy proposed the restructuring plan months later, he said.

EP Energy was one of a growing number of oil and gas companies pushed into bankruptcy over the past year as investors grew disaffected with shale and U.S. drilling activity slowed down.

Many energy companies financed production growth by becoming deeply indebted, betting that higher oil prices would sustain them. But investor interest has faded after years of meager returns, and many private companies and smaller public drillers are now struggling to meet obligations.

Apollo led a debt-fueled buyout of EP Energy in 2012, when oil traded at nearly $110 a barrel. Analysts now worry it could dip below $40 as the coronavirus fallout spreads.

-- Jonathan Randles and Sarah Toy contributed to this article.

Write to Andrew Scurria at Andrew.Scurria@wsj.com

(END) Dow Jones Newswires

March 06, 2020 17:52 ET (22:52 GMT)