Recent Chapter 11 filings
BANKRUPTCIES IN OIL AND GAS ON THE UPSWING
JOHN MELKO, GARDERE WYNNE SEWELL LLP, HOUSTON
STARTING AT THE END OF 2014 and continuing through the spring of 2015, calls came from distressed buyers looking for bargain purchases of oil and gas producing properties as prices fell. Sellers, believing the decline to be temporary, clung to high asking prices. Buyers, believing differently, made low bids. This came to be called the "expectation gap." The temporary price recovery chilled the already slow M&A market.
That price spike succumbed to the basic economic indicators that old oil hands recognized earlier: at-capacity storage facilities, lease acreage that must be drilled (if not completed), foreign producers and those in choice basins in the US that would, and in some cases had to, continue to produce, and finally the inevitable cooling of China's demand for commodities.
Early casualties of a distressed industry are those that are thinly capitalized, overleveraged, or who came late to the party and paid too much to enter. This cycle is no different.
Following is a representative sampling of oil and gas company filings. The explanations of what factors drove them into Chapter 11 are drawn from their bankruptcy papers and public filings. At the end, there are some observations or conclusions based on the sample.
Debtor: Buccaneer Resources LLC, et al
Date of Filing: June 3, 2014
Headquarters: Houston
Place of Filing: Victoria, Texas
Buccaneer Resources was traded on the Australian stock exchange. It bought mineral interests in the Gulf of Mexico in the Eagle Ford shale formations as prices were increasing. Later, it acquired drilling rights in Alaska state waters, aided in part by Alaska state drilling credits. High acquisition and capex requirements followed by the 2008 commodity crash significantly impaired the Texas operations. Alaska operations were impacted later by operational problems including rig acquisition and repair expenses. Add to that a healthy dose of litigation. The company was an early casualty, filing bankruptcy in June 2014. Buccaneer reported assets of $47 million and liabilities of $143 million at the beginning of the case. Ultimately, the oil and gas assets were "sold" to the existing secured lenders which credit bid $44 million.
Debtor: Endeavour Operating Corporation, et al
Date of Filing: June 3, 2014
Headquarters: Houston
Place of Filing: Victoria, Texas
Endeavour's last SEC filing prior to its bankruptcy reported assets of $1.34 billion and liabilities of $1.63 billion. Most of Endeavour's assets were in the North Sea. In 2014, Endeavour ran into capital constraints which hurt US production. In the three years prior to bankruptcy, Endeavour's debt increased by over $500 million due to "natural disasters, adverse and unforeseen operating issues, delays in new production … and operating difficulties particular to the North Sea …" Ultimately, Endeavour's secured lenders "bought" the stock of the holding company and the intercompany note from the UK entities, as well as a commitment to pay administrative expenses and wind up the US operations for a credit bid.
Debtor: Quicksilver Resources Inc., et al
Date of Filing: March 17, 2015
Headquarters: Fort Worth, Texas
Place of Filing: Wilmington, Delaware
Fort Worth, Texas-based Quicksilver filed bankruptcy citing $1.2 billion in assets and $2.3 billion in liabilities. Quicksilver cited high costs, oil commodity prices and high levels of capital expenditures required under its agreement with a midstream company which built a pipeline for its Canadian operations. Quicksilver ran a marketing program in late 2014 but could not find any qualified, interested bidders. The Quicksilver reorganization continues.
Debtor: Dune Energy Inc., et al
Date of Filing: March 9, 2015
Headquarters: Houston
Place of Filing: Austin, Texas
Houston based Dune Energy filed Chapter 11 in Austin, Texas, in March. Its assets consisted of 15 producing fields in South Louisiana. At the time of filing, Dune reported assets of $198 million and liabilities of $150 million. In October 2014, Dune signed a merger agreement but its merger partner breached just a month later. After numerous forbearance agreements and the arranging of post-petition credit, Dune filed Chapter 11 with the intent to sell its assets. Dune's assets were sold in blocks. The first sold for $1 plus assumption of the remediation obligations. The second block sold for $19 million cash plus assumption of remediation obligations.
Debtor: Boomerang Tube LLC, et al
Date of Filing: June 9, 2015
Headquarters: Chesterfield, Missouri, and Liberty, Texas
Place of Filing: Wilmington, DE
Boomerang reported assets of $299 million and total liabilities of $461 million. Boomerang's filings described it as a leading manufacturer of welded oil tubular country goods in the US. Its business is tied directly to the drilling and completion of oil and gas wells. The rig count dropped from 1,929 in September 2014 to 875 in May 2015, just before its Chapter 11 filing. 1Q 2015 revenue dropped by 62%. After numerous forbearance agreements, Boomerang reached a Plan Support Agreement providing for conversion of approximately $214 million in secured debt into stock in a new holding company. The case is continuing.
Debtor: Saratoga Resources Inc., et al
Date of Filing: June 19, 2015
Headquarters: Houston
Place of Filing: Lafayette, Louisiana
This is Saratoga's second Chapter 11. Saratoga's first filing came in March 2009. It successfully confirmed a Plan in 2010 which paid creditors in full and kept equity intact. Saratoga drills and produces in transitional and shallow waters in South Louisiana. After its last bankruptcy, it expanded through debt and equity raises. Saratoga had good drilling results but ran into unanticipated field expenses in early 2014. After the commodity price drop in late 2014 to early 2015, Saratoga negotiated a string of forbearance agreements with its secured lenders, but ultimately filed Chapter 11 after approximately a $3.5 million arbitration award was entered against it. Saratoga's last SEC filing listed assets of $101 million and liabilities of $219 million. The case is continuing.
Debtor: Sabine Oil & Gas Corp.
Date of Filing: July 15, 2015
Headquarters: Houston
Place of Filing: New York, New York
One of the largest casualties of the current price drop is Sabine Oil and Gas Corp. Sabine reported $2.5 billion in assets and $2.9 billion in debt. Sabine's operations consist of oil and gas wells, predominantly in Texas. Sabine's story is perhaps the most complicated. In late 2014, Sabine Oil and Gas LLC entered into a merger agreement with Forest Oil Corp. Despite dropping commodity prices, the merger was consummated in December 2014. A little over two months later the owners of the "Old Forest" 2019 Notes sued to set aside the merger claiming it triggered defaults under the 2019 note indenture. Sabine negotiated numerous forbearance agreements, but ultimately had to file bankruptcy without a firm deal in place. The case is a little over a month old, and continues.
From this sampling of new cases, old lessons emerge:
- Don't buy more acreage than you can afford to drill;
- It takes deep pockets to operate in water which is deep and cold, or shallow and muddy;
- If you are in the service business and your customers stop working, shift to maintenance activity, cut expenses and pray for better times - most lenders gave multiple extensions.
- Communicate with stakeholders - they are in the same boat; and, finally;
- If running the business and servicing debt is dependent upon continuing frothy prices, remember, you are playing with house money, and generally, the house wins.
ABOUT THE AUTHOR
John Melko is a partner in the Houston office of Gardere Wynne Sewell LLP and chair of the firm's Financial Restructuring and Reorganization Practice Group. Melko focuses his practice on assisting oil and gas, energy, electric, and maritime clients with complex financial and business restructurings.