Thu 06/18/2020 14:57 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
Restructuring Support Agreement
Cash Collateral Motion
First Day Hearing Agenda
 
Summary
Chisholm Oil and Gas is an oil and gas exploration and production company focused in the STACK
RSA with holders of 99.6% of prepetition RBL agreement claims and consenting sponsors - affiliates of Apollo and Ares - provides for debt restructuring
Case to be funded by use of cash collateral; debtors propose three-month process
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Chisholm Oil and Gas Operating II, a Tulsa, Okla.-based oil and gas exploration and production company, and several affiliates, filed for chapter 11 protection on Wednesday in the Bankruptcy Court for the District of Delaware. The company has entered into a restructuring support agreement with (a) its lenders under the RBL agreement that hold 99.6% of the claims arising under the RBL agreement and (b) consenting sponsors Chisholm Oil and Gas, LLC and Gastar Holdco LLC (affiliates of Apollo Global Management LLC and Ares Management, LLC), which indirectly hold 100% of the outstanding equity interests in the company. The debtors seek to “effectuate a partial equitization of the Company’s funded debt obligations and a distribution of take-back debt, coupled with availability of new working capital through the funding of an exit financing facility.” The proposed restructuring would allow the debtors to emerge “substantially de-levered from approximately $517 million in prepetition funded debt and with additional working capital.”

The RSA provides for a replacement of a portion of the claims under the RBL agreement with up to $40 million in new debt in the form of a first-lien second-out exit facility and equitizing the remaining RBL claims. Holders of allowed term loan claims, general unsecured claims and equity interests in Chisholm Oil and Gas Operating II, LLC, if such classes vote to accept the plan, would get a distribution of equity and warrants. Assuming such junior classes vote to accept the plan, equity would be split as follows (all subject to dilution by a 5% MIP):
 
  • RBL Lenders: 95% of reorganized equity
  • Term Lenders and GUCs: 3% of reorganized equity and warrants for an additional 6%
  • Equity: 2% of reorganized equity and warrants for an additional 5%

The RSA also contemplates a new reserve based lending facility upon emergence to fund working capital and other general corporate purposes, “in an amount to be determined prior to the approval of a disclosure statement by the Court.” The debtors propose a three-month bankruptcy process. The exit facilities and warrants and described further below.

Consenting creditors under the RSA include Cargill, Inc.; Goldman Sachs Lending Partners LLC; Macquarie Capital Funding LLC; Morgan Stanley Senior Funding, Inc.; Royal Bank of Canada; Bancfirst; and Toronto-Dominion Bank, New York Branch.

The first day hearing has been scheduled for tomorrow, Friday, June 19 at 1 p.m. ET. The case docket is available on Reorg HERE.

The company reports $1 billion to $10 billion in assets and $500 million to $1 billion in liabilities. The company’s prepetition capital structure includes approximately $517 million in outstanding funded debt:
 
  • Secured debt:
     
    • First lien RBL agreement: $263 million (including undrawn letters of credit)
       
    • Second lien term loan: $254 million
  • Equity: According to the petition, Ares Management owns approximately 58% of the membership interests and Apollo Global Management owns approximately 42% of the interests in Chisholm Oil and Gas Holdings LLC.

Citibank is the RBL agent and Wilmington Trust is the RBL collateral agent, and the loan matures on March 21, 2022. Wilmington Trust is the term loan agent, and that loan matures on March 21, 2024. The term loan principal has increased from $250 million to approximately $254 million, which includes payment in kind interest that has been added to the principal as a result of the company’s exercise of a payable in kind election under the agreement.

Pursuant to an intercreditor agreement, the term loan liens are subordinated to the RBL liens, according to the first day declaration.

The debtors have approximately $35 million in cash as of the petition date, “all of which is subject to liens pledged in favor of the First Lien Secured Parties and constitutes Cash Collateral.”

The company attributes the bankruptcy filing to performance troubles with respect to its assets located in the Sooner Trend Anadarko Basin Canadian and Kingfisher County, or STACK, area of Oklahoma, including repeatedly missed production projections. Chisholm acquired oil and gas assets in this area based on the “highly productive” success of previously drilled wells, but “financial models, asset valuations, extraction projections, and, ultimately, capital structures of E&P companies in the region” - all based on the area’s initial success - “ultimately proved to be wrong.”

The miscalculations, the debtors say, were a result of “several factors that were unaccounted for in initial assessments of the region,” with the debtors noting that, “most, if not all,” producers in the STACK have failed to meet production expectations and landed in financial distress, citing the chapter 11 filings of STACK producers, including Gastar (2018), White Star Petroleum (2019), Alta Mesa Resources (2019) and Chaparral Energy (2016). Reorg has reviewed issues in the STACK here.

The debtors say that their new engineering team has been able to develop wells at lower costs with greater yields, and the company “expects to see continued improvements as it continues to refine its geological modeling and targeting capabilities.” However, liquidity issues have stymied the debtors’ efforts to implement a new drilling plan, as the last several months have been focused on restructuring pursuits. Chisholm sought to increase the RBL debt capacity by $50 million but only secured an increase of $13 million, which was insufficient to continue developing its assets and forced the company to suspend the drilling of new wells. In early 2020, the debtors retained advisors in an effort to overcome their liquidity struggles, but oil demand and prices experienced a sharp reduction shortly after. These complications were exacerbated by the onset and spread of the Covid-19 pandemic, a “price war” between Russia and Saudi Arabia and storage shortages which all further drove prices down.

Thereafter, the debtors determined they did not have sufficient liquidity to make their next interest payment due under the term loan and elected not to make the payment and entered into a five-day grace period. This subsequently gave rise to events of default under both the term loan and RBL. To prevent the exercise of remedies against Chisholm and its assets as a result of the default and to provide the parties with sufficient runway to negotiate and document the restructuring transaction, Chisholm entered into a forbearance agreement with the RBL parties on April 7 that extended the terms through June 14, at which point the forbearance was replaced by a forbearance under the terms of the RSA. The forbearance and RSA also provided the company with relief to consensually monetize its oil hedging contracts and use the proceeds to fund ongoing operating expenses and these chapter 11 cases, rather than pay down RBL claims.

The debtors are represented by Weil Gotshal and Young Conaway as co-legal counsel, Evercore as investment banker and Alvarez & Marsal as financial advisor. Omni Agent Solutions is the debtors’ claims agent. The case has been assigned to Judge Brendan Linehan Shannon (case number 20-11593).

Background

Chisholm is an exploration and production company focused on acquiring, developing and producing oil and natural gas assets in the Anadarko Basin in Oklahoma and STACK. The company’s business activities are focused on horizontal development of oil and gas properties in the STACK and the revenue is generated by the production and sale of oil, gas, and natural gas liquids from those properties. The company maintains operational control over approximately 90% of its reserves and contracts with various third parties for extractions at the remaining 10% of its sites. As of the petition date, the company holds approximately 152,000 of “highly contiguous” net acres of oil and gas interests. As of the petition date, the company is operating 80% of its horizontal wells, with the remaining 20% still capped as a result of economic and liquidity conditions. It is currently not engaged in any drilling activities. The company has 32 employees and between 10 to 25 independent contractors.

The company also has in-house salt-water disposal capabilities through its wholly owned subsidiary, Cottonmouth SWD, LLC, which reduces the company’s overall cost and reliance on third party infrastructure while potentially providing an additional income stream resulting from services rendered to third parties. However, as of the petition date, these salt-water disposal operations are not operating.

Additionally, non-debtor affiliate Chisholm Midstream, LLC holds a 35% equity stake in a midstream oil and gas gathering and transportation business, Great Salt Plains Midstream Holdings, LLC, which provides services to gather, transport and process the company’s produced oil and gas to bring to market for sale. Debtor Chisholm Oil and Gas Holdings, LLC holds certain profit interest in Great Salt but does not hold any capital interests.

Prior to the company’s formation, Robert Zinke, an oil and gas prospector with 43 years experience, worked with Apollo to identify oil and gas investment opportunities. Zinke and Apollo identified approximately 53,000 acres located in the STACK play near Kingfisher County, Okla., which at the time was owned by Staghorn Petroleum, LLC. On March 22, 2018, Zinke and Apollo formed Chisholm Oil and Gas LLC and purchased the 53,000 acres from Staghorn.

Following its formation, the company continued to expand its acreage through “bolt-on and strategic acquisitions.” In 2018, the company explored the merger and acquisition of Gastar Exploration LLC, an exploration and production company that held STACK assets and was owned by Ares Management LLC. In 2018, Gastar filed for chapter 11 protection and, after its emergence in 2019, the company engaged in discussions regarding a potential acquisition. The parties negotiated an acquisition where Gastar would contribute its assets to Chisholm and, in exchange, Chisholm would provide Ares approximately 42% equity and 50% stake of control rights of a new post-transaction Chisholm entity. On June 9, 2019, Gastar and Chisholm entered into a contribution agreement where Chisholm and Gastar contributed substantially all of their equity interests in their respective subsidiaries in the newly-formed entity, Chisholm Oil and Gas Holdings, LLC. On Aug. 9, 2019, the parties entered into a merger agreement where substantially all of Gastar’s assets were transferred to Chisholm Oil and Gas Operating, LLC, which owns substantially all of the debtors’ assets. As a result, Chisholm Oil and Gas LLC and Gastar Holdco LLC became the direct owners of Chisholm Oil and Gas Holdings.

The petition provides the following corporate organizational chart:
 

The debtors' largest unsecured creditors are listed below:
 
10 Largest Unsecured Creditors
Creditor Location Claim Type Claim Amount
Unit Drilling Company Tulsa, Okla. Trade $    2,905,500
Halliburton Energy Services Houston Trade 2,553,281
Legacy Drilling LLC Stillwater, Okla. Trade 2,504,112
Alta Mesa Services, LP Houston Trade 1,496,233
Reliance Oilfield Services, LLC Tulsa, Okla. Trade 629,500
Mesa Natural Gas Solutions, LLC Evansville, Wyo. Trade 599,243
Heartland Compression Services Mooreland, Okla. Trade 523,428
Ovintiv Mid-Continent Inc. The Woodlands, Texas Trade 514,325
Victoria W&C Ronald Lewis JT Windsor Heights, Iowa Royalty 497,509
Smart Chemical Services, LP Amarillo, Texas Trade 440,579

The case representatives are as follows:
 
Representatives
Role Name Firm Location
Debtors' Co-Counsel Matthew S. Barr Weil, Gotshal
& Manges
New York
Kelly DiBlasi
Lauren Tauro
Debtors' Co-Counsel M. Blake Cleary Young
Conaway
Stargatt
& Taylor
Wilmington, Del.
Jaime Luton Chapman
S. Alexander Faris
Debtors' Investment
Banker
N/A Evercore N/A
Debtors' Financial
Advisor
Matthew J. Henry Alvarez
& Marsal
 
Debtors' Claims
Agent
Paul H. Deutch Omni Agent
Solutions
New York
Counsel to the
1L Agent
Margot B. Schonholtz Linklaters New York
Penelope J. Jensen
Christopher Hunker
Local Counsel
to the 1L Agent
Derek C. Abbott Morris,
Nichols, Arsht
& Tunnell
Wilmington, Del.
Taylor Haga
Counsel to the
2L Agent
George H. Singer Ballard
Spahr
Minneapolis
Mark C. Dietzen
United States
Trustee
Timothy Jay Fox, Jr. Office of the
U.S. Trustee
Wilmington, Del.

Restructuring Support Agreement

Treatment of Claims and Interests

The RSA sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
 

Warrants

The warrants are to purchase new equity representing in the aggregate 11% of the total outstanding new equity issued pursuant to the plan as of the effective date (subject to dilution by the management incentive plan) exercisable in cash for a five-year period commencing on the plan effective date at an aggregate exercise strike price in an amount equal to a 100% recovery to the RBL lenders on account of the RBL claims (inclusive of accrued and unpaid interest) as of the petition date.

Milestones

The milestones contemplated under the RSA, that constitute consenting creditor termination events, are as follows:
 
  • Interim cash collateral order: Entered within five days of petition date
  • Plan, disclosure statement: Filed within 10 days of the petition date
  • Final cash collateral order: Entered within 40 days of the petition date
  • DS order: Entered within 45 days of petition date
  • Confirmation order: Entered within 90 days of petition date
  • Plan effective date: Within 10 business days after entry of the confirmation order

Management Incentive Plan

The RSA contemplates a management incentive plan to provide for the issuance of 5% of the new equity interests on a fully diluted basis.

Exit Facilities

The RSA contemplates the following exit facilities that would provide that excess cash of the company above $15 million must be used first to repay any outstanding obligations under the first-lien first-out new money RBL exit facility and second to repay obligations under the first-lien second-out exit term loan:
 
  • a first-lien first-out new money exit reserve-based credit facility, in an amount to be determined prior to approval of the DS, to be provided by the RBL lenders and any other lenders that elect to become lenders under the facility; and
  • a first-lien second-out take-back term loan facility, with a seven-year maturity, sized at 1.5x annualized corporate EBITDAX (calculated at exit based on balance of fiscal year 2020 business plan with 10% production risking) in a principal amount no greater than $40 million. The loan would bear interest at LIBOR plus 6%.

New Board

The new board would consist of five members selected by the requisite creditors, defined as “[a]s of the date of determination, Consenting Creditors holding at least a majority of the aggregate principal amount outstanding of the RBL Obligations held by the Consenting Creditors as of such date.” Consenting creditors are those RBL holders who have signed on to the RSA.

Cash Collateral Motion

The debtors seek the consensual use of cash collateral through the earliest of 40 days after the petition date if the final order has yet to be entered and Oct. 5, 2020 and other customary events. Adequate protection for the prepetition first lien secured parties would be in the form of: (a) adequate protection liens, (b) allowed superpriority administrative expense claims, (c) liens on avoidance action proceeds subject to entry of the final order, (d) financial reporting requirements, (e) payment of the professionals’ fees and expenses and (f) payment of unpaid fees and and costs due under the first lien agreement including “breakage costs and accrued fees owing to the First Lien Agent and the First Lien Collateral Agent.”

According to the motion, “pursuant to the Intercreditor Agreement, the Second Lien Agent, on behalf of itself and other Second Lien Secured Parties, agreed that it will raise no objection to, will not contest, or is deemed to have consented to the Debtors’ use of Cash Collateral and the granting of adequate protection to the First Lien Secured Parties.”

The debtors propose to pay to the first lien agent, Citibank, adequate protection payments on the last business day of each calendar month in an amount equal to all accrued and unpaid fees and costs due and payable. The debtors also contemplate a reconciliation protocol for prepetition mechanics and materialmen’s liens, with a cap of $8 million in the aggregate.

In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b) with respect to the first lien agent and the other first lien secured parties, both subject to the final order. The carveout for professional fees is $1 million. The proposed 13-week cash flow forecast is HERE.

The lien challenge deadline is 75 days from the date of entry of the interim cash collateral order, or, if an official committee of unsecured creditors is appointed, 60 days from the appointment. The UCC lien investigation budget is $50,000.

Other Motions

The debtors also filed various standard first day motions, including the following:
 
 
 
 
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