July 11, 2019 − Privately-held Shale Support Global Holdings, LLC and seven affiliated Debtors ("Shale Support" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-33884. The Company, a provider of logistical services and frac-sand or “proppant” products, is represented by Karl Daniel Burrer of Greenberg Traurig, LLP. Further board-authorized engagements include (i) Alvarez & Marsal as financial advisor, (ii) Piper Jaffray & Co. as investment banker and (iii) Donlin Recano as claims agent.
The Debtors’ lead petition notes between 1 and 50 creditors, estimated assets of $3.2mn and estimated liabilities of $127.9mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Coyote Logistics, LLV ($3.6mn settlement agreement), (ii) J. Patrick Lee Construction ($1.4mn trade debt) and (iii) Trinity Industries Leasing Co. ($1.4mn trade debt).
In a press release announcing the filing, Shale Support stated: “The reorganization cases contemplate the restructuring of debt from the Company’s balance sheet, substantially deleveraging Shale Support’s capital structure and strongly positioning the Company for long-term success. The Company currently estimates that it will emerge from the Chapter 11 reorganization within approximately 90 to 100 days, and fully expects operations to continue as normal throughout the court-supervised financial restructuring process.
The Company also announced it has secured a $16.6 million debtor-in-possession credit facility (the ‘DIP Facility’) from the Company’s senior lender to finance working capital needs and allow business operations to continue as normal during the restructuring process, including meeting obligations to employees, vendors and others. The DIP Facility and commencement of chapter11 cases allows the Company to continue normal business operations during the court-supervised restructuring process."
Chapter 11 Objectives
Exactly what the Debtors hope to get out of Chapter 11 is not clear. A prepetition effort to find a purchaser was entirely fruitless given market conditions. The Debtors are in ongoing discussions wth stakeholders concerning a "de-leveraging transaction," but what can be deleveraged? Even with an improved balance sheet, how do the Debtors address their admitted lack of competitiveness from a pricing standpoint? If the Debtors end up in the hands of their pre-petition senior lenders as seems likely, then another effort at a sale would also be likely. But how is a bankruptcy going to make Shale Support significantly more attractive to purchasers who have only recently emphatically passed on the same purchase opportunity? The rejection (and renegotiation) of railcar leases can cut some costs, but this is not going to be a life-changing cost saving.
The Barton Declaration states: "Shale Support’s discussions with its stakeholders have focused on building consensus around a de-leveraging transaction. These discussions have included, among other things: (a) the provision of a substantial amount of diligence to the Prepetition Term Loan Lenders and their advisors; (b) ongoing dialogue and communication around the Shale Support enterprise, its operations, and its prospects; and (c) regular meetings to discuss Shale Support’s potential restructuring path. To date, those negotiations have not resulted in global consensus around the Debtors’ ultimate restructuring.
As a condition of the proposed DIP facility, the Debtors must move swiftly through Chapter 11. The Prepetition Term Loan Lenders’ commitment to provide the proposed DIP financing and facilitate the Debtors’ restructuring are each contingent on the Debtors executing their restructuring in accordance with certain milestones (the 'Milestones') defined in the DIP credit agreement. Under the Milestones, the Debtors must confirm a chapter 11 plan of reorganization and emerge from bankruptcy within 98 days after the Petition Date. The Debtors, cognizant of the turbulent operating backdrop, believe they will be able to consummate their restructuring in accordance with the Milestones and thereby maximize the value of the entire Shale Support enterprise.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Barton Declaration”), Gary Barton, the Debtors' Chief Restructuring Officer, detailed the events leading to Shale Support’s Chapter 11 filing, which are now familiar in respect of businesses which service the E&P and OFS (oilfield services) sectors, ie a conflux of (i) lower demand from under-capacity and cash-strapped clients, (i) lower prices in a highly competitive market and (iii) resulting liquidity constraints that impede the ability to react opportunistically to market improvements when they happen. For a supplier of frac sand, this is compounded by what are largely fixed costs, notably in respect of leased railcars. A word of warning to the Debtors' railcar lessors (which make up the large majority of the Debtors' top 40 unsecured creditors list), your leases are about to be rejected.
The Barton Declaration states: "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.
As a result of these new sources of supply and sequentially lower demand, supply for proppants exceeded demand in the second half of 2018 driving down prices for frac sand. While prices were declining through the fourth quarter of 2018, Shale Support believed that demand would increase in early 2019 on an expectation of increased drilling and completion activity. While demand for frac sand did increase substantially in the first quarter of 2019, Shale Support lacked the liquidity to finance the costs necessary to capture its forecasted share of the increased demand. Further, the increased demand did not result in the higher prices Shale Support had projected. As a result, Shale Support’s net revenue per ton fell over 40% in 2018.
In contrast to the volatile nature of proppant pricing, Shale Support’s costs are largely fixed. A significant fixed cost is the cost of leasing railcars utilized to transport frac sand. Shale Support leases approximately 1,320 railcars from various lessors to transport sand from the Drying Facility to its transload facilities network. Due to an overall decreased industry demand for railcars, Shale Support believes that its railcar leases are at prices significantly above current market rates. In addition, Shale Support’s mining and production operations are capital intensive endeavors that require consistent capital expenditures to maintain the underlying assets.
The foregoing circumstances have significantly strained Shale Support’s enterprise-wide liquidity and caused Shale Support’s capital structure to become unsustainable."
Prepetition Capital Structure
Prepetition Term Loan: In August 2017, the Debtors entered into a prepetition term loan agreement (the “Prepetition Term Loan Agreement”) that provided the Debtors with a secured term loan credit facility in an amount of $100.0mnn (the “Prepetition Term Loan”). The Prepetition Term Loan has a maturity date of August 15, 2021 and accrues interest at a rate per annum equal to (a) a fixed rate of 10%; or (b) at the borrowers’ election pursuant to the Prepetition Term Loan Agreement, a fixed rate of 12% with respect to payment-in-kind, or “PIK,” interest. Following the occurrence of an Event of Default (as defined in the Prepetition Term Loan Agreement), an additional 3% is added to the applicable rate of interest. To date, lenders under this agreement have waived the Debtors' defaults.
As of the Petition date, the Debtors’ had outstanding funded debt obligations in the aggregate amount of approximately $116.0mn.
Siena Revolving Credit Facility: In February 2018, the Debtors SES entered into a revolving loan and security agreement (the “Siena Revolving Loan Agreement”) that provided the Debtors with a secured asset-based revolving credit facility in an amount up to $10.0mn (the “Siena Revolving Credit Facility”). The Siena Revolving Credit Facility has a maturity date of February 28, 2021 and accrues interest at a rate per annum equal to a base rate indexed to the Prime Rate plus an applicable margin of 3.5%. Following the occurrence of an Event of Default (as defined in the Siena Revolving Loan Agreement), an additional 5% is added to the applicable rate of interest.
As of the Petition Date, the Debtors’ had outstanding funded debt obligations in the aggregate amount of approximately $11.6mn.
As at the Petition date, the Debtors had two principal shareholders:
- MOR Bison, LLC: 69.24%
- BBR Holdings, LLC: 29.67%
About the Debtors
Shale Support is a privately owned, vertically integrated proppant supplier to the exploration and production sector of the oil and gas industry with 179 employees. The Debtors’ proppants are comprised of monocrystalline sand (i.e., ’frac sand’) designed to keep an induced hydraulic fracture open to enhance oil and gas product recovery in unconventional shale deposits. Frac sand is known as a “proppant” because it props the fracture in rock open by forming a network of pore spaces that allow the hydrocarbons to flow out of the rock and into a drilled well.
With the logistic flexibility to ship proppant via rail, road and barge, Shale Support’s network boasts more than 100 million tons of frac-sand reserves within its mining properties.
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