July 11, 2019
When privately-owned companies that most people have never heard of file for bankruptcy, it naturally raises the following logical question: with oil and gas once again imploding, how many off-the-run companies are going to wind their way into bankruptcy court? 🤔 We reckon quite a number.
Shale Support Global Holdings LLC, a private Louisiana-based proppant supplier to oilfield servicing companies that, in turn, service E&P companies, filed for bankruptcy in the Southern District of Texas. The company and 7 affiliated debtors (the “Debtors”) have little by way of assets ($3.15mm) and much more by way of debt ($127.8mm). MOR Bison LLC and BBC Holding LLC own 69.24% and 29.67% of the company, respectively.
The company started in 2014 to solve the problem of expensive logistics costs emanating out of the transport of sand to frac sites. The company sought to vertically integrate the ownership of sand mines with, among other things, a drying facility and a transload facility; its mines are in Mississippi. Given what has occurred in oil and gas country since 2014, it seems abundantly clear that the timing here was just a bit off. “How off,” you ask? Per the Debtors:
Demand for frac sand is significantly influenced by the level of well completions by E&P and OFS companies, which depends largely on the current and anticipated profitability of developing oil and natural gas reserves. As such, Shale Support’s business is highly correlated with well completions, which is, in-turn, is dependent on both commodity prices and producers’ ability to deliver oil to the market. Over the past five years, commodity prices have been highly volatile resulting in an unpredictable demand curve and a significant amount of OFS and E&P bankruptcies. Compounding these demand issues, Shale Support operates in a highly-competitive industry that has seen a dramatic increase in supply. This new supply has come from basin-specific regional producers (that have dramatically lower logistic costs) as well as larger, often better-capitalized, competitors. Regional suppliers and Shale Support’s larger competitors are both in a position to exert significant, downward pressure on pricing for proppants.
Said another way, as off as humanly possible. With a supply/demand imbalance in 2H ‘18, the company saw revenue fall over 40% in 2018. 😬 This was in large part due to the fact that, despite falling proppants prices, the Debtors are locked in to fixed cost contracts with railcar transport providers. With this mix plus over $127mm in outstanding debt obligations, liquidity became an issue.
For over a year now, the Debtors have been in a state of perpetual marketing. Piper Jaffrey & Co., the Debtors’ banker, could not, however, locate a buyer. In the midst of discussions with potential strategic and financial buyers, the price of frac sand continued to fall. Per the Debtors:
Unsurprisingly, no party submitted an indicative expression of interest, a non-binding offer or a valuation of Shale Support. The stated justification from these parties centered around market conditions, location of the reserves, quality of sand, availability of buyer cash, and consistent underperformance of business relative to forecasts.
Efforts to refinance the debt were equally unsuccessful given the declining asset value upon which a new loan would be based. Ultimately, the Debtors defaulted under their prepetition term loan agreement and, over the course of multiple months of waivers, negotiated with their lenders with the hope of “building consensus around a de-leveraging transaction.” Spoiler alert: there’s no prepackaged plan on file here nor is there a bid procedures motion accompanied by a stalking horse asset purchase agreement so suffice it to say that whatever consensus there might be is limited to the commitment of a $16.6mm DIP credit facility. And that forces the issue: under the DIP milestones, the Debtors must confirm a plan of reorganization within 98 days. Will the lenders equitize? Given the astounding job the first day papers do of making the assets seem attractive, is there a chance in hell a buyer emerges? Stay tuned.
Jurisdiction: S.D. of Texas (Judge Jones)
Capital Structure: $116mm ‘21 10% cash/12% PIK Term Loan (including interest, etc.), $11.6mm ‘21 ABL (Siena)
Legal: Greenberg Traurig LLP (Shari Heyen, Karl Burrer, David Eastlake, Eric Howe)
Financial Advisor/CRO: Alvarez & Marsal LLC (Gary Barton)
Investment Banker: Piper Jaffray & Co. (Richard Shinder)
Claims Agent: Donlin Recano & Company Inc. (*click on the link above for free docket access)
Other Parties in Interest:
Prepetition Term Loan & DIP Agent ($16.6mm): BSP Agency LLC (DIP Lenders: Providence Debt Fund III LP, Benefit Street Debt Fund IV LP, and Benefit Street Partners SMA LM LP).
Legal: Baker Botts LLP (Emanuel Grillo)
Prepetition Revolving Lender: Siena Lending Group LLC
Legal: Thompson Coburn LLP (David Warfield, Victor A. Des Laurier)