Thu 10/01/2020 11:07 AM
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Relevant Documents:
Voluntary Petition
First Day Declaration
Plan of Reorganization
Disclosure Statement
DS Approval Motion
Cash Collateral Motion
First Day Hearing Agenda
Lonestar Resources chapter 11 filing case summary from First Day by Reorg

​​​​​​The above relevant documents for the Lonestar Resources chapter 11 filing are available only to current First Day by Reorg and Americas Middle Market by Reorg clients and trialists; please request a trial to access them and follow thousands of other chapter 11 filings.


Lonestar Operating, LLC doing business as Lonestar Resources, a Fort Worth, Texas-based E&P company focused on the Eagle Ford Shale, filed for chapter 11 protection on Wednesday in the Bankruptcy Court for the Southern District of Texas. The debtors are seeking confirmation of a prepackaged plan and disclosure statement. In an 8-K filed by Lonestar earlier this month, the company announced its entry into a restructuring support agreement dated Sept. 14 with certain of its revolving lenders and certain holders of its 11.25% senior notes. The RSA was entered into with Citibank as prepetition RBL agent, holders of 100% of the outstanding principal amount of the prepetition revolving credit facility and holders of 83.8% of the outstanding principal amount of the debtors’ senior unsecured notes. Chambers Energy Capital III, LP, the sole holder of the preferred stock of parent Lonestar Resources US Inc., has entered into a letter agreement with the debtors through which it also agreed to support the plan. The proposed restructuring would eliminate approximately $390 million of funded debt.

The RSA contemplates that the plan would be funded with cash on hand and about $30 million resulting from the consensual termination of the debtors’ existing hedging arrangements with the consenting RBL lenders. As further detailed below, the company’s 11.25% senior notes due 2023 would receive a pro rata share of 96% of new equity (subject to dilution by the management incentive plan and the new warrants). The recovery for lenders under the company’s revolving credit facility who agree to accept the plan includes revolving loans under an exit revolving credit facility, term loans under a second-out exit term facility and a pro rata share of warrants to purchase up to 10% of the new equity interests in the company. The RBL lenders would also receive, whether they accept or reject the plan, a pro rata share of cash equal to accrued and unpaid non-default interest owed under the prepetition RBL agreement through the effective date (plus fees and other amounts excluding principal). Prepetition RBL lenders that do not vote or vote to reject the plan would receive exit last out term loans equal to 100% of their outstanding principal, in addition to payment of accrued but unpaid non-default interest in cash.

Holders of preferred equity interests in the company will receive their pro rata share of 3% of the new equity interests in the company (subject to dilution by the MIP and warrants), and holders of existing Class A common stock in the company will receive their pro rata share of 1% of the new equity interests in the company (subject to dilution by the MIP and warrants). General unsecured creditors would be paid in full in cash.

On the plan effective date, the reorganized debtors would enter into:

  • A first-out senior secured revolving credit facility subject to a borrowing base in an amount equal to 80% of the aggregate outstanding principal amount of loans and letters of credit under the company’s existing revolving credit facility held by prepetition RBL lenders that vote to accept the plan (provided that on the effective date, the aggregate principal amount of the new revolving credit facility may not be less than $152 million);

  • A second-out senior secured term loan credit facility in an amount equal to 20% of the aggregate outstanding principal amount of loans and letters of credit under the company’s existing revolving credit facility of the consenting RBL lenders and the accepting lenders; and

  • If necessary, a last-out senior secured term loan credit facility in an amount equal to 100% of the aggregate outstanding principal amount of loans and letters of credit of any lenders under the existing revolving credit facility that do not vote to accept the plan.


The warrants issued to holders of allowed RBL claims that vote to accept the plan will receive their pro rata share of two tranches of warrants. With the exception of the exercise conditions, described below, the terms of the tranches will be identical, representing a number of new equity interests of the parent equal to the product of (a) 5% and (b) the percentage of used and unused commitments held by the consenting RBL lenders and the accepting lenders, on a fully diluted basis, subject to dilution only by the MIP equity. The warrants will be exercisable at any time prior to the third anniversary of the plan effective date, subject to satisfaction of the exercise conditions.

The consenting creditors under the RSA are: (i) Citibank, the RBL agent; (ii) JPMorgan Chase Bank; (iii) ABN ARMP Capital USA; (iv) Comerica Bank; (v) Truist Bank, Iberiabank; (vi) OCM Energy Holdings; (vii) Barclays Bank; and (viii) Fifth Third Bank. The noteholder signatories include FS/EIG Advisor, Hotchkis and Wiley Capital Management, Loomis, Sayles & Co. and David Matlin.

The first day hearing has been scheduled for today, Oct. 1, at 11 a.m. ET.

The company reports $500 million to $1 billion in both assets and liabilities. The company’s prepetition capital structure includes:

  • Secured debt:

    • RBL facility (Citibank as agent): $285 million in principal plus $400,000 in letters of credit



  • Unsecured debt:

    • 11.25% senior unsecured notes due 2023: $250 million in principal

    • Trade debt and other obligations (including royalty obligations): $27 million

    • PPP loan: $2.2 million





  • Equity: Parent Lonestar Resources US Inc.’s Class A common stock is listed on Nasdaq under the “LONE” ticker. Preferred stock holder Chambers has the right to appoint a certain number of directors to parent’s board under certain conditions. Jefferies Financial Group Inc. and its affiliates are the largest holders of Class A common stock on a pre-converted basis, with the remainder held by the public at large and widely disbursed.

    • As of March 31: (a) Jefferies held approximately 18% of the company’s issued and outstanding Class A common stock on a pre-converted basis (or approximately 11% of such stock on an as-converted basis), (b) Chambers did not hold any class A common stock on a pre-converted basis (but held 40% of such stock on an as-converted basis) and (c) the executive officers and directors of Lonestar Resources US Inc. (other than those directors appointed by Chambers) held 4% of parent’s issued and outstanding class A common stock on a pre-converted basis, and 3% of such stock on an as-converted basis. Jefferies holds the same voting rights as the other holders of class A common stock, “but has been granted the right by Parent to have a non-voting Board observer in light of Jefferies’ substantial equity holdings.”




The prepetition RBL facility matures Nov. 15, 2023, and as of the petition date, the borrowing base is $225 million and there is a borrowing base deficiency of $60.4 million. The debtors defaulted under the RBL prepetition facility leading to various forbearance agreements prepetition. The company elected not to make a $14.1 million interest payment on the prepetition notes on July 1, resulting in a forbearance agreement that was continued through the RSA.

The debtors monetized all of their existing hedges resulting in approximately $30.5 million in net proceeds, which will be used to partially fund the chapter 11 cases and partially pay down the debtors’ exit facilities upon plan consummation. ”The Debtors expect, as of the Petition Date, they will have total available liquidity of approximately $36.1 million (including approximately $30.5 million of proceeds from the Hedge Monetization),” according to the first day declaration.

Non-debtor affiliate Boland owes $8.8 million in secured building loans in connection with the purchase of an office building in Fort Worth, Texas, which currently holds the company’s corporate offices, but the loans do not constitute prepetition debt of the debtors.

Despite “accretive growth in acquisitions, relatively low production and operational costs, successful ability to place Hedges and increase in proved developed reserves growth,” the company attributes the bankruptcy filing to “significant revenue, cash flow, and liquidity challenges” beginning in 2018 due to falling commodity prices. Crude oil prices have been “extremely volatile” since 2019, the debtors add, and decreased even more steeply in early of 2020, “at times reaching near or at the lowest prices ever recorded in the United States.” The impact of these market circumstances has made it “increasingly difficult” for the debtors to continue to service their debt obligations. Even with hedges in place, challenges facing the oil and gas industry and broader economy have led to a “significant decline” in Lonestar’s financial health.

The debtors elected not to make a semi-annual interest payment to the prepetition noteholders due on July 1 in the amount of $14.1 million. During the 30-day grace period, the debtors entered into forbearance agreements, giving the debtors additional time to engage with the noteholders and RBL lenders on the terms of a consensual restructuring.

The debtors are represented by Latham & Watkins and Andrews Hunton Kurth as counsel, Rothschild and Intrepid Financial Partners as investment bankers and AlixPartners as financial advisor. Prime Clerk is the claims agent. The case has been assigned to Judge David R. Jones (case number 20-34804).

Background

Lonestar is a crude oil and natural gas exploration and production company focused on unconventional crude oil, natural gas and natural gas liquids, or NGLs, in the Eagle Ford Shale region of South Texas. Operating 256 wells spanning 52,000 net acres of land in the region, the debtors increased their net Eagle Ford acreage by a factor of 14 between 2011 and 2019. The debtors have 82 employees, none of which are parties to collective bargaining agreements.

The debtors typically serve as the operator of wells in which they have a significant economic interest, and operate approximately 84% of their Eagle Ford position as of June 30, 2020. In addition to the wells Lonestar operates, the company is also a non-operating working interest partner in an additional 47 wells in the Eagle Ford region.

For the six months ended June 30, 2020, the debtors’ average net daily production was 13,888 barrels of oil equivalents (MBoepd), with total oil and natural gas revenues of $54.25 million, of which $42 million was attributable to crude oil sales, $7.9 million to natural gas sales and $4.4 million to NGL sales.

As of June 30, the debtors’ top five customers collectively accounted for 85% of Lonestar’s total revenue from the marketing of crude oil, natural gas and NGLs. “While the debtors’ oil and gas properties are located in a competitive environment,” the first day declaration says, “a significant number of available buyers and available transportation infrastructure exists in the areas where the debtors operate.” Consequently, despite the competitive nature of the oil and gas industry, “the Debtors believe they could procure substitute or additional customers without a significantly long period of material impact on the Debtors’ revenues with respect to crude oil, natural gas or NGL volumes, or significant capital expenditure requirements for infrastructure, if the Debtors were to lose one or more of their material customers.”

The debtors’ largest unsecured creditors are listed below:


Lonestar Resources chapter 11 filing unsecured creditors from First Day by Reorg

The case representatives are as follows:



Lonestar Resources chapter 11 filing case representatives from First Day by Reorg


DS Approval Motion / Confirmation Timeline

The debtors’ disclosure statement approval motion proposes the following confirmation-related timeline:
Lonestar Resources chapter 11 filing confirmation timeline from First Day by Reorg

Plan of Reorganization / Disclosure Statement

Below is a chart of the plan’s classes, along with their impairment status and voting rights.
Lonestar Resources chapter 11 filing plan classes from First Day by Reorg

Treatment of Claims and Interests

The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
Lonestar Resources chapter 11 filing proposed distributions from First Day by Reorg




(Click HERE to enlarge.)


Management Incentive Plan

On or before the 60th day following the plan effective date or as soon as reasonably practicable thereafter, the reorganized parent would enter into a management incentive plan which would reserve 8% of the new equity interests on a fully diluted basis to certain members of senior management to be determined by the new board and otherwise contain terms and conditions to be determined by the new board.

New Board

The initial directors of the board or other governing body of the reorganized parent would be selected by the ad hoc noteholder group and would include the CEO of the organized parent.

Exit Facilities

On the effective date, the existing credit agreement would be amended to provide for a first-out senior secured revolving credit facility in an amount equal to 80% of the aggregate outstanding principal amount of loans and LC exposure under the existing credit agreement on the closing date of the consenting RBL lenders and any other lender under the existing credit agreement that votes to accept the plan of reorganization, provided that, on the closing date, the aggregate principal amount of the revolving credit facility shall not be less than $152 million. The amended credit agreement will also provide for a second-out senior secured term loan facility in an amount equal to 20% of the aggregate outstanding principal amount of loans and LC exposure under the existing credit agreement on the closing date and, if necessary, a last-out senior secured term loan facility in an amount equal to 100% of the aggregate outstanding principal amount of loans and LC exposure on the closing date of any RBL lenders under the existing credit agreement that are not consenting RBL lenders or accepting lenders.

The revolving credit facility and the second-out term loan facility would mature on the date falling 36 months after the closing date. The second-out term loan facility will amortize with quarterly installments in an amount equal to $5 million, commencing on Dec. 31. Any amounts applied as a prepayment of the second-out term loans would be applied as a credit against the immediately succeeding amortization installment or installments. The last-out term loan facility would mature on the date falling 42 months after the closing date. The revolving credit facility and the last-out term loan facility would not be subject to amortization.

A portion of the revolving credit facility not in excess of $2.5 million would be available for the issuance of letters of credit by Citibank. Letters of credit issued under the existing credit agreement which remain undrawn on the closing date would be “rolled” into and automatically be deemed to be issued and outstanding under the revolving credit facility.

The loans under the revolving credit facility and the term loans would accrue interest at a rate per annum equal to LIBOR, subject to a 1% floor, plus 4.5% or, at the option of the borrower, ABR plus 3.5%. The facilities would include customary provisions relating to a replacement rate for LIBOR.

The borrowing base would be substantially consistent with the existing credit agreement giving due regard to the documentation principles, provided that the first scheduled borrowing base redetermination would occur on Feb. 1, 2021, and that there would be no scheduled or interim redeterminations prior to such date. The redetermination of the borrowing base on Feb. 1, 2021, may be based on a reserve report prepared by the chief engineer of the borrower. On the closing date, the initial borrowing base would be set at the amount of the revolving credit facility. In addition to any other rights of the borrower to request an interim borrowing base redetermination, if the second-out term loan facility is repaid in full in cash on or prior to the date falling 12 months after the closing date, the borrower would have the right to elect an additional interim borrowing base redetermination within 30 days of the full cash repayment of the second-out term loan facility.

Subject to the senior ranking of secured swap agreements, the revolving credit facility will be the most senior ranking credit facility in right of payment under the amended and restated senior secured credit agreement. The second-out term loan facility will be subordinate in right of payment to the obligations under the revolving credit facility and senior in right of payment to the last-out term loan facility. The last-out term loan facility will be subordinate in right of payment to the revolving credit facility and the second-out term loan facility. The revolving credit facility, second-out term loan facility and last-out term loan facility will be guaranteed and secured by a common first priority lien on the collateral on a pari passu basis.

The secured swap agreements would rank senior in right of payment to the principal and interest under the revolving credit facility pursuant to the application of proceeds waterfall and would rank second behind only payment of fees, expenses and indemnities to the administrative agent, provided that upon satisfaction of the release condition, all secured swap agreements would automatically rank pari in right of payment with principal under the revolving credit facility, and if any lender assigns all of its rights and obligations under the amended and restated senior secured credit agreement and terminates its secured swap agreement pursuant to an additional termination event arising due to such assignment, such secured swap agreements would automatically rank pari in right of payment with principal under the revolving credit facility.

Financial covenants will apply only to the revolver and be tested on the last day of each fiscal quarter. The covenants include a 3.5x total debt to EBITDAX ratio, with a minimum for the ratio of 0.95x for the fiscal quarter ending Dec. 31 and 1x for any fiscal quarter thereafter. All other financial definitions and calculations are substantially consistent with the existing credit agreement. Negative covenants are substantially consistent with the existing credit agreement.

Warrants

The tranche 1 warrants will be exercisable at $0.001 any time after the equity value of the parent is first equal to or greater than the minimum equity value, or $100 million. The tranche 2 warrants will be exercisable at $0.001 on or after the first anniversary of the plan effective date, (i) any time after the equity value of the parent is first equal to or greater than the minimum equity value, and (ii) in the event the second out term loan facility remains outstanding as of the first anniversary of the plan effective date.

Cleansing Materials

Lonestar in the 8-K provided a presentation dated Aug. 26 including confidential financial projections. The company is projecting revenue of $42 million in the third quarter and $30 million in the fourth quarter and $125 million in 2021. EBITDAX is projected to be $30 million in the third quarter and $18 million in the fourth quarter and $80 million in 2021. The company says it expects to generate negative $25 million of unlevered free cash flow in the third quarter and positive $33 million of unlevered free cash flow in the fourth quarter, and positive $25 million of unlevered free cash flow in 2021.
Lonestar Resources chapter 11 filing projections from First Day by Reorg

Liquidation Analysis

The DS includes a hypothetical liquidation analysis, as follows:
Lonestar Resources chapter 11 liquidation analysis from First Day by Reorg

Financial Projections

The debtors provide the following financial projections:
Lonestar Resources chapter 11 financial projections from First Day by Reorg

 
Lonestar Resources chapter 11 financial projections from First Day by Reorg

 
Lonestar Resources chapter 11 financial projections from First Day by Reorg

Valuation Analysis

The DS includes a valuation analysis prepared by Intrepid Partners, the debtors’ financial advisor, providing for a total enterprise value of approximately $290 million to $415 million with a midpoint of $353 million, as of an assumed effective date of Nov. 1. Based on estimated pro forma net debt of $264 million as of the effective date, the estimated total enterprise value of the reorganized debtors results in a plan equity value of approximately $26 million to $151 million, with a midpoint of $89 million.

Cash Collateral Motion

The debtors seek the authority to use the cash collateral of Citibank, the prepetition administrative agent, and the prepetition lenders. The debtors explain that their operations are “largely dependent upon their ability to regularly convert the Prepetition Collateral into Cash Collateral” and without that authorization, the debtors would not be able to fund payments to vendors and employees.

Pursuant to the budget, the proposed use of the cash collateral is for operating and non-operating costs and disbursements as well as for working capital to invest and maintain the proved developed producing reserves, maintenance of proved undeveloped reserves in the oil and gas properties and chapter 11 related costs.

The company proposes the following adequate protection to its prepetition lenders: (i) adequate protection liens; (ii) allowed superpriority administrative claims; (iii) monthly adequate protection payments in the amount equal to all accrued and unpaid prepetition and postpetition interest, fees and costs; (iv) payment of reasonable professional fees and expenses incurred by the prepetition agent arising prepetition; (v) payment of reasonable professional fees and expenses incurred by the prepetition agent arising subsequent to the petition date; and (vi) reporting.

The adequate protection liens include first priority senior priming security interests and liens. Subject to the entry of a final order, the adequate protection liens would attach to proceeds or property recovered in respect of any avoidance actions.

Additionally, the adequate protection package includes the assurance by the debtors that any disposition of collateral will be in exchange for all cash consideration that would constitute cash collateral that would be used in accordance with the interim cash collateral order.

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), subject to entry of a final order.

The interim order does not include budgeted fees for advisors to official committees. The carve-out for professional fees of the debtors is $1.25 million.

The proposed budget for the use of cash collateral is HERE.

The proposed interim use of cash collateral does not contain any sale or confirmation milestones.

Other Motions

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



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