September 4, 2019
When most people think of oil and gas they think of Texas. This makes sense given production volume but there are other areas of exploration and production in the United States that garner far less attention. Like Colorado.
Bankruptcy professionals have some experience already in Colorado. Bonanza Creek Energy Inc. ($BCEI), as just one example, filed for chapter 11 bankruptcy in early 2017. Given all of the oil and gas activity in bankruptcy court lately, 2019 is the new 2017.
CASE IN POINT (wink to one of our readers), PetroShare Corp. ($PRHR), a developer of crude oil and gas properties in the Rocky Mountain/mid-continent region of the US, filed for bankruptcy on September 4, 2019, in the District of Colorado. The debtor did us a favor in filing its minutes from a March 25, 2019 board meeting. It provided a bit of unintentional comedy.
Noting that, amidst a default under its secured credit agreement, the debtor’s lender representatives both resigned from the board and terminated negotiations related to a second sale of certain company assets (PETITION Note: the company had already sold $15.5mm of non-operating assets, the proceeds of which are held by the company’s lenders), the minutes reflect how recent political machinations affected the oil and gas environment in Colorado:
“…in terminating the negotiations, the Lender group and the potential equity group cited the recent dramatic changes in the Colorado political climate reflected in the proposed SB 19-181 which seeks to change the charter and direction of the Colorado Oil and Gas Conservation Commission and the potential detriment to local oil and gas development. He also noted the recently-approved 6 month moratorium on new drilling permits in Adams County, Colorado, where the bulk of the Company’s properties are located.”
Whoops. It’s hard to generate revenue when your ability to produce properties is hindered by new local regulations. That’s what you call a post-investment intervening negative externality.
Consequently, the company engaged in discussions with its lenders. Per the minutes:
“…the representatives of the Administrative Agent suggested that the Company consider other-recapitalization options including, but not limited to, filing a friendly Chapter 11 bankruptcy and then working with the Lenders to file a pre-packaged or similar reorganization plan to address trade debt, the senior loan and the unsecured noteholders.”
To which we have to say:
Typically a pre-packaged bankruptcy, by definition, is agreed to PRIOR TO a bankruptcy filing. It’s not all willy-nilly, “we filed, now let’s be ‘friendly’ and agree to sh*t.” Everything about that entry is amusing.
Subsequently, the company discussed a variety of options. Do they attempt additional sales? Do they solicit private equity interest? Is bankruptcy the right option. Per the minutes:
“Mr. Witsell passed along information that he had received from the law firm Polsinelli on the benefits and detriments of pursuing bankruptcy.”
It all sounds so cavalier. It’s like a pitch deck from Polsinelli just fell from the sky into management’s laps. These are the pros (shed debt, free and clear sales, screw trade) and these are the cons (stigma, court supervision, expensive AF)! Ready, set, FILE! Gotta love bankruptcy!
Jokes aside, the company attempted to avoid bankruptcy (as you might expect) and thought they had a buyer lined up that would consummate an out-of-court transaction. That buyer fell through, however, at the 11th hour. This left the company with a backup bidder who required a chapter 11 filing (because, like, they’re apparently a bit more sophisticated??). The company, therefore, will use the chapter 11 process to continue to market and try and maximize value in a competitive auction — assuming competitive bidders emerge in the midst of considerable regulatory headwinds.
Jurisdiction: D. of Colorado (Judge Tyson)
Capital Structure: $14.3mm secured debt, $9.3mm convertible notes
Legal: Polsinelli PC (Trey Monsour, James Billingsley, William Meyer, James Bird, Caryn Wang)
Financial Advisor/CRO: MACCO Restructuring Group LLC (Drew McManigle, Kathy Mayle)
Investment Banker: Seaport Global Securities LLC
Claims Agent: BMC Group (*click on the link above for free docket access)
Other Parties in Interest:
Secured Lenders: Providence Wattenberg, 5NR Wattenberg
Large Equityholders: Providence Energy Operators LLC & Cede & Co.