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Pacific's restructuring would mark reversal of fortune for company that stood at vanguard of continent's oil boom

By Sara Schaefer Muñoz and Anatoly Kurmanaev 

BOGOTÁ, Colombia -- Latin America's largest privately owned oil producer said it was preparing to file for bankruptcy-court protection after reaching a tentative restructuring deal Monday that leaves shareholders with cents on the dollar.

The deal would cap a humbling turn of events for Pacific Exploration & Production Corp., which once stood at the vanguard of South America's oil boom. At its peak earlier this decade, Pacific was worth $8 billion, employed 30,000 people and had so much cash it flew pop star Marc Anthony to a corporate party.

Pacific has become a major bust from the global commodity downturn, a slide that current and former directors and employees say was aggravated by mismanagement, wild overspending and poor investments.

"Pacific was a big success story, but it didn't make the right choices," said Nathan Piper, an analyst at RBC Capital Markets. "It didn't have to be in the situation it's in today."

Pacific spokesman Tom Becker said management made investment decisions based on the best available information at the time.

The restructuring agreed with Canadian hedge fund The Catalyst Capital Group Inc. on Monday would inject $500 million and cut $5 billion of the company's debt, at the cost of wiping out equity holders. The deal now needs to be approved by two-thirds of the bondholders.

Founded by Venezuelan oil and mining executives who had fled their country's socialist government, the scrappy startup grew to become Colombia's second-largest company, after state-controlled Ecopetrol SA, and helped transform the country into the continent's third largest producer.

In 2012, Colombian magazine Dinero featured the management team on its cover, with the headline "The Magic of Pacific."

Pacific's highly visible executives, Serafino Iacono and Ronald Pantin, flew in private jets and built sprawling country houses. Pacific sponsored the national soccer team, an annual PGA Golf Championship and in 2013, congress gave Mr. Iacono the prestigious Order of Democracy award for his business activities.

Money flowed in, and right out. The firm made nearly a dozen acquisitions, branching into natural gas and infrastructure, among them a 35% stake in the ODL oil pipeline and a 41.6% stake in the city of Cartagena's $600 million new port, which the company said helped it grow and decrease operating costs.

But analysts and employees say the company's spending spree -- especially the cash acquisition of oil explorer Petrominerales Ltd. in 2014 for $909 million -- racked up an unsustainable $5 billion in debt.

"We had huge overhang just as times turned bad," said a former executive, who said the firm's directors took out more loans to pay for Petrominerales instead of more prudently paying in shares.

Even then, investors were willing to pile in. Mexican conglomerate Grupo Industrial Alfa SAB boosted a small stake to 19% of the company in 2014 for $1 billion.

Analysts also say that Pacific overstated reserves, inflating demand for its debt and shares long after the price of crude had fallen and production became less profitable.

Mr. Becker, the Pacific spokesman, said the company hired independent third-party reserves analysts in accordance with securities laws.

The company tasked to calculate Pacific's reserves, Canada-based Petrotech Engineering Ltd., said in 2013 that the company had more than 30 million barrels of proven reserves in its CPE-6 block in Colombia's eastern plains, even as the owner of the other half of the block, Canada's Talisman Energy Inc., said its own reserve calculations for CPE-6 were zero.

In an interview, Petrotech founder John Yu said he based his calculations on several factors allowed under Canadian law, including an estimated future oil price that was higher than what it turned out to be.

People inside and outside the company said Pacific directors based their 2015 budget on $80 per barrel oil when the futures market was already pricing in a further fall. Mr. Becker said management "immediately began to cut costs and budgets to reflect the new oil price reality" in late 2014.

As Pacific's woes piled on in early 2015, a group of young Venezuelans investors saw an opportunity to snatch the company on the cheap, giving them a vehicle to expand into the massive oil sector back home. They racked up a nearly 20% stake in the company for $290 million. Those investors, grouped in investment vehicle O'Hara Administration Co., are led by electricity contractor Alejandro Betancourt, whose company Derwick Associates has been investigated by U.S. authorities for bribery.

A Derwick spokesman said the investigation was suspended after the Justice Department reviewed its bank accounts. The Justice Department declined to comment on the status of the investigation.

Just days after O'Hara upped its stake, Mexico's Alfa and U.S.-based partner Harbour Energy Ltd. offered to buy Pacific for a high of 6.50 Canadian dollars (US$5.1) a share -- Pacific is also listed in Toronto -- to use the company in Mexico's new oil auctions. But new Venezuelan shareholders blocked the offer, hoping to gain control of the company themselves.

The Alfa bid for Pacific was "a miracle" amid low world oil prices, said Ian MacQueen, analyst at Paradigm Capital. "It was also [unbelievable] that the bid was turned down."

When the deal failed, Pacific's shares plummeted 45% further, to C$2.85 on the Toronto stock exchange. As prices of crude continued to sink, so did the share price, and the O'Hara group lost 70% of their initial investment.

Now O'Hara, and the rest of Pacific's shareholders, could face a total wipeout if the restructuring deal is approved. Top management, however, will be able to own up to 10% of the restructured company's shares under the incentive plan offered by Catalyst.

Write to Anatoly Kurmanaev at Anatoly.kurmanaev@wsj.com

(END) Dow Jones Newswires

April 20, 2016 02:49 ET (06:49 GMT)

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