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Brought Down by Long Bust, Texas Oil Men Pray for Another Boom

The Wall Street Journal. logo The Wall Street Journal. 3/5/2017 Bradley Olson
© Scott Dalton for The Wall Street Journal

Just 2½ years ago, when a barrel of oil sold for about $100, John Schiller and his wife, Kristi, were living luxuriantly in Houston high society.

Mr. Schiller, the founder and chief executive of Energy XXI Ltd., had just closed a $1.5 billion deal to buy rival EPL Oil & Gas Inc. and create the largest publicly traded oil producer in the shallow waters of the Gulf of Mexico.

Mrs. Schiller, a former Playboy model, was featured in People Magazine for her work with K9s4COPS, which gives trained police dogs to law enforcement. The nonprofit ran a float in California’s Rose Parade, and the Schillers waved to crowds as they stood beneath a 20-foot statue of their German shepherd, Johnny Cash.

Today, the Schillers are trying to avoid going broke. What many in the oil industry hoped would be a brief season of pain after prices began plunging in 2014 has turned into an arduously long recovery with oil stuck around $50 a barrel, affecting not only the bottom lines of companies but the personal finances of once-prosperous families.

Much of the couple’s net worth was wiped out when Mr. Schiller bet big that prices would quickly rebound—and lost. He’d used his Energy XXI shares as collateral for personal loans, and when their price fell along with the price of crude, he faced a series of devastating margin calls, documents show.

To cover his debts, he borrowed money from vendors to the company, and an investor who became a board member, according to company securities filings. After the board learned of the loans from the Securities and Exchange Commission and its own internal investigation, it stripped Mr. Schiller of his chairman title in 2015.

Energy XXI declared bankruptcy last April, and on Feb. 2, a new board ousted Mr. Schiller, just after he’d steered the company out of Chapter 11. They let Mr. Schiller retrieve his belongings from the $2,000-a-month Jaguar the company had leased for him, then called him a car ride home, according to people familiar with the matter.

Mr. Schiller was on the host committee for this year’s Super Bowl, held in Houston, but he didn’t get to go to the game. Energy XXI sold its tickets.

The couple say they believe the worst of the crash is over—for them and for the industry. While the Schillers lament what they lost, they are keeping hope alive with a vow made familiar by risk-taking oil prospectors: They say they’re going to win it all back.

In an interview, Mr. Schiller says he has surveyed the landscape of companies drilling for oil and gas in the Gulf of Mexico and feels now could be one of the best times in decades to go on a buying spree.

Friends and associates say they expect Mr. Schiller to quickly line up financial backers for a new venture and strike a flurry of deals to wage a comeback.

“Your two choices are to quit and put a gun to your head or to go out, make some sacrifices and say, I’ve done this once, I’ve done it twice, I’ll do it again,” says Mr. Schiller, who is 57 years old.

Mrs. Schiller, 46, is promising to make the best of things, regardless of what happens.

“If John and I have to move to a Mickey Gilley double-wide trailer, by God, I will have the first one ever photographed for Architectural Digest,” she says.

Michael Reddin, the interim chief executive of the company, now formally Energy XXI Gulf Coast, Inc., declined to comment through a spokesman. A spokesman for the SEC, which bankruptcy documents show had learned of Mr. Schiller’s loans as part of a separate investigation into a matter unrelated to Energy XXI, also declined to comment.

The Schillers’ story is a testament to the roller-caster nature of oil money, the latest example of a tale that has many prior versions, especially in Texas.

“Diamond Glenn” McCarthy, the gun-toting wildcatter who spent $21 million to build Houston’s opulent Shamrock Hotel in the 1940s, overextended himself and had to sell out. The Hilton family acquired it in the 1950s. Sid W. Richardson, who was recognized by Fortune Magazine as one of the richest Americans in 1957, had to pay workers in food for a time during the Great Depression before recovering and leaving his inheritance to his nephew, the father of the billionaire Bass brothers of Fort Worth.

The latest bust has taken a heavy toll on an oil archetype: the big-living, big-dreaming wildcatter. Several of Mr. Schiller’s counterparts—self-made company founders who lived lavishly in the days of $100 prices—have been brought down.

Last March, fracking pioneer Aubrey McClendon died in a fiery car crash in Oklahoma City, a day after he was indicted on criminal charges of conspiring to rig the price of oil and gas leases. Tracy Krohn, once identified as a billionaire by Forbes magazine, has seen the value of his shares in W&T Offshore Inc. fall from more than $2.3 billion in 2008 to about $127 million today.

Boards have increasingly sought to move beyond wildcatter founders and their friends to lead companies. Recently minted energy CEOs are far more likely to be pragmatists than the risk-takers whose bets created the boom.

“A lot of the swagger has gone to Silicon Valley,” says Les Csorba, an executive recruiter at Heidrick & Struggles International Inc. “The downturn has created a humbling.”

Mr. Schiller proudly remains an old-school oil man. Standing about 6’3” with a swath of gray curly hair, he often wears soft kangaroo leather or alligator-skin boots. His gold Texas A&M University class ring constantly adorns his right fist.

He carries a thick wad of $100 bills in a silver clip emblazoned with the name of his homestead, Schiller Ranch. When times were good a few years ago, he’d take one of the bills and hand it to a stranger, seeking to “brighten someone’s day,” a colleague recalled.

His spending occasionally worried associates who wondered whether he could become overextended, according to two friends. Although his compensation was on the higher end for Houston executives—he was set to earn as much as $14 million from Energy XXI in 2014—Mr. Schiller was no billionaire.

Around the time the deal for EPL closed in June 2014, Mr. Schiller was one of the largest shareholders of Energy XXI. His stake was worth about $30 million. When oil prices started falling that year, Mr. Schiller initially reasoned they would soon bounce back.

One associate remembers Mr. Schiller saying he was going to double down and that oil would be back over $100 in a year. He was so confident he cashed out of derivative contracts that locked in a higher price for the coming year.

From July to October, oil fell from about $105 a barrel to $80, and Energy XXI shares fell along with it. Mr. Schiller began to receive emails from a bank that had given him a loan backed in part by his company stock. Because the share prices had fallen, he would need to post more collateral.

Not wanting to sell his shares, he turned for loans to friends, some of whom did work for Energy XXI. In all, he borrowed $13 million from individuals with ties to the company, according to securities and bankruptcy filings.

An internal investigation led by outside law firm Sidley Austin LLP found his actions weren’t illegal and that there was no evidence he directed business to those who had provided loans. It did find that he violated the company’s code of conduct in not disclosing the loans.

By late November, the bottom was falling out of the oil market. As the Schillers attended a Texas A&M football game against Louisiana State University on Thanksgiving Day, they took in some bad news: Saudi Arabia announced it wouldn’t prop up flagging prices by cutting its oil production. LSU wound up beating A&M, 23-17. The next day, Energy XXI fell 37% to $4.01, a 90% decline from just a few years before.

“It was like watching your house burn down, but the water from the fire hose couldn’t quite reach it to put out the flames,” Mrs. Schiller recalled.

Mr. Schiller took an opulent 29th-floor conference room—it was once used to entertain employees and guests with cigars and tequila—and turned it into a “war room” where he renegotiated with company creditors. Within a few months, Mr. Schiller brokered a lifeline that would allow Energy XXI to survive for 18 months, as long as oil held at $45 a barrel.

Prices dropped below $30 a barrel in 2016. The company declared bankruptcy last April, and Mr. Schiller’s 1.1 million shares were rendered almost worthless.

Even though he could have sold them before the rest of the carnage took hold, Mr. Schiller declined. Always a believer in Energy XXI, he says he didn’t sell because he couldn’t bear to think of missing out on a potential upswing. He also didn’t want to send the wrong message to investors, he added.

When he finally sold shares that had once been worth more than $50 million, they fetched about $60,000.

“He was putting his personal wherewithal behind the company,” says Hugh Ray, a Houston bankruptcy attorney at McKool Smith who followed the drama. “It would have been a lot easier for him to just cut and run and throw the thing in the tank long before it went under.”

Mr. Ray says he expects a wave of personal bankruptcies in Houston. Such filings usually trail those of companies by 18 months to two years.

The Schillers haven’t been forced to declare bankruptcy, and they still have their 350-acre Texas ranch. But they put their 7,502 square-foot mansion in the exclusive River Oaks neighborhood on the market in August for about $5.4 million and have since cut the price by $500,000. Among other amenities, it features a two-story, air-conditioned playhouse used by their daughter, who is in elementary school.

The new board installed by Energy XXI’s former creditors decided to part ways with Mr. Schiller, believing the aggressive deal maker wasn’t the right fit for the more conservative strategy they would need to pursue, according to people familiar with the matter.

From April to December, Mr. Schiller says he received about 20% of his prebankruptcy compensation package. He is set to get a $2 million payment in April, as well as $50,000 a month in consulting fees for up to six months, according to company filings. He is prohibited from disparaging new Energy XXI leaders. He declined to discuss the contract or the reasons for his departure, saying only that he resigned.

Mrs. Schiller, who breeds and sells race horses at the couple’s ranch and once had more than 150 on site, is now down to around 40. Her nonprofit, once run out of donated office space in a posh seventh-floor suite near the Galleria mall, now has its offices in one of the larger barns at the ranch. In 2016, her charity donated more dogs than in any previous year.

“It’s been a time to readjust, to step back and say, ‘Do I really need that? Does that really make my life better?’ ” Mrs. Schiller says. “A house is just a house.”

In a recent interview at his ranch, Mr. Schiller declines to say exactly what he will do next. He said he is enjoying time off after a grueling few years. Then he smiles.

“I’ve taken a few calls,” he says. “I’m not retiring at 57, I’ll say that.”

If he fails to rebound, Mr. Schiller said, he will merely go back to the life he had in his mid-30s, when he made $250,000-a-year as an engineer and lived in a suburban Houston neighborhood. His children lacked for nothing, and he knew his neighbors well, he jokes. It wasn’t so bad.

“The toughest thing in the world, don’t kid yourself, is getting back in the saddle and drilling a ninth well when you’ve drilled eight straight dry holes,” he says. “But what other choice is there?”

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