August 11, 2019 − Sanchez Energy Corporation and 10 affiliated Debtors (OTC Pink: "SNEC," “Sanchez Energy” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-34508. The Debtors, an independent exploration and production company focused on the acquisition and development of U.S. onshore unconventional oil and natural gas resources, are represented by Matthew D. Cavenaugh of Jackson Walker L.L.P. Further board-authorized engagements include (i) Akin Gump Strauss Hauer & Feld LLP as general bankruptcy counsel, (ii) Moelis & Company LLC as financial advisor, (iii) Alvarez & Marsal North America, LLC as restructuring advisor and (iv) Prime Clerk as claims agent.
The Debtors’ lead petition notes between 10,000 and 25,000 creditors, estimated assets of $2.16bn and estimated liabilities of $2.85bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Delaware Trust Company as administrator for 6.125% Senior Notes due 2023 ($1.19bn notes claim, including interest), (ii) Delaware Trust Company as administrator for 7.75% Senior Notes due 2021 ($600.0mn notes claim) and (iii) Marathon Oil ($8.9mn trade debt).
In a press release announcing the filing, the Debtors advised that: “The Company’s decision to make this voluntary filing follows an extensive review of strategic alternatives to align its capital structure with the continued low commodity price environment, and Sanchez Energy intends to use this process to substantially reduce its indebtedness and provide the financial flexibility to position the Company for future success. The Company has significant liquidity, comprised of cash on hand and $175 million in new committed financing as described below, to operate in the normal course and intends to interact with its commercial counterparties as usual.
Sanchez Energy has received commitments from certain of its senior lenders for $175 million in new financing, of which $25 million will be used to repay borrowings and replace a letter of credit currently outstanding under the Company’s existing revolving credit facility and, along with cash on hand and cash flow generated by ongoing operations, support the business and fund continued capital investment throughout the restructuring process.
Pre-Petition Capital Structure
|
Obligation |
Maturity |
Principal Amount |
|
First-Out Senior Secured Revolving Credit Facility |
2023 |
$25.0mn |
|
7.25% Senior Secured Notes |
2023 |
$500.0mn |
|
Aggregate Secured Debt |
|
$525.0mn |
|
7.75% Senior Notes |
2021 |
$600.0mn |
|
6.125% Senior Notes |
2023 |
$1.15bn |
|
Aggregate Unsecured Debt |
|
$1.75bn |
|
Aggregate Total Debt |
|
$2.275bn |
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “George Declaration”), Cameron W. George, the Debtors' Executive Vice President and Chief Financial Officer, detailed the events leading to the Debtors’ Chapter 11 filing. The George Declaration states: "…a confluence of events has adversely impacted the Debtors’ businesses. Such events include, among other things, the prolonged and continuing period of commodity price decline and volatility now lasting nearly half a decade, and the resultant and related financial difficulties associated with managing high levels of debt under such market dynamics. Further, a large portion of the Company’s acquisition activity occurred in a substantially higher commodity price environment, leading to the incurrence of significant indebtedness to fund transactions to grow and develop its businesses and resulting in burdensome interest expense obligations that can no longer be serviced by the diminished present and forecasted cash flows from the Debtors’ assets. The Company has also faced unique challenges arising from the integration and management of the large and complex Comanche Assets (as defined below), acquired with a partner in 2017, which rapidly multiplied the size and scale of the Debtors’ businesses. The Debtors were successful in navigating these individual and cumulative obstacles by, among other things, reducing costs, cutting capital expenditures, and taking other proactive measures. However, absent a new money investment and significant deleveraging of their capital structure, the Debtors will soon lack sufficient liquidity to (i) fund ordinary course operations; (ii) invest in a strategic E&P asset development program; and (iii) satisfy the aforementioned ongoing payment obligations under their debt documents."
On the subject of the Debtors' liquidity crunch and the current status of discussions with stakeholders, the George Declaration continues: "In anticipation of potential looming liquidity constraints, earlier this year, the Debtors commenced discussions with both their existing stakeholders and potential third-party investors with respect to a comprehensive recapitalization and/or restructuring solution.
Among the primary drivers of these anticipated liquidity constraints were (i) a $35.2 million interest payment due on July 15, 2019 for the 6.125% Senior Notes (the ‘July 15 Coupon’), and (ii) a $18.1 million interest payment due on August 15, 2019 for the 7.25% Senior Secured Notes… based on the status of those negotiations prior to the payment date for the July 15 Coupon, the Debtors elected not to pay the July 15 Coupon and instead entered a 30-day grace period in respect of such coupon in order to preserve liquidity and continue negotiations with stakeholders as long as possible. Negotiations with the Debtors’ stakeholders continued throughout the grace period. Although the Debtors have not reached an agreement with their stakeholders on the terms of a comprehensive restructuring transaction, the Debtors have secured $175 million of new money debtor in possession financing (‘DIP Financing’) from the members of the Secured Notes Ad Hoc Group (as defined below).
Pending Litigation
The George Declaration notes two ongoing material litigations which may impact the course of the Debtors' Chapter 11 cases. They are (i) a derivative action filed in Delaware against certain of the Debtors' directors (Armato et al. v. A.R. Sanchez, Jr. et al., No. 2018-0642) alleging breach of fiduciary duty, unjust enrichment, and waste of corporate assets against directors on purportedly excessive compensation of SN’s non-employee directors and (ii) a disagreement with Blackstone (by and through its subsidiary, Gavilan) regarding operations of the Debtors' Comanche Assets under a joint development agreement (JDA) with Blackstone (inter alia, Blackstone has asserted that SN Maverick is in default of the Comanche JDA and Blackstone has the right to take over operations of the Comanche Assets).
About the Debtors
Sanchez Energy Corporation (OTC Pink: SNEC) is an independent exploration and production company focused on the acquisition and development of U.S. onshore unconventional oil and natural gas resources, with a current focus on the Eagle Ford Shale in South Texas. Through organic and significant acquisition activities, the Debtors have assembled a strategic, highly concentrated position in the Eagle Ford Shale and are generally considered among the most active operators in the basin. The Debtors, along with certain of their non-Debtor subsidiaries, also hold certain other producing properties and undeveloped acreage, including in the Tuscaloosa Marine Shale (the “TMS”) in Mississippi and Louisiana.
For more information about Sanchez Energy Corporation, see: www.sanchezenergycorp.com and the Debtors' SEC filings.
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