September 15, 2019 − Sheridan Production Company, LLC and eight affiliated Debtors (“SPC” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-35198. The Debtors, a Houston-based oil and gas company, are represented by Matthew D. Cavenaugh of Jackson Walker L.L.P. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Evercore Group L.L.C. (“Evercore”) as investment banker, (iii) AlixPartners, LLP (“AlixPartners”), as restructuring advisor and (iv) Prime Clerk as claims agent.
The Debtors’ lead petition notes between 5,000 and 10,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Wilmington Trust, National Association (as trustee for $513.9mn in 2022 PIK Notes), (ii) Oxy USA WTP LP ($492k suspended funds claim) and (iii) TCB Trustee Acct 101 ($334k suspended funds claim).
Restructuring Support Agreement
The Debtors have entered into a restructuring support agreement (the "RSA") with holders of each of their three many groups of funded debt (see, "Pre-petition Capital Structure," below) further to which these "Lenders" have agreed to a debt-for-equity restructuring subject to a toggle to a Section 363 assets sale.
The Disclosure Statement provides: "Beginning in early 2019, the Debtors entered into comprehensive restructuring negotiations with the lenders under the Sheridan II Term Loan Facilities (the ‘Sheridan II Term Lenders’), the lenders under the Sheridan II Revolving Credit Facilities (the ‘Sheridan II Revolving Lenders’ and, together with the Sheridan II Term Lenders, the ‘Senior Secured Lenders’), and the lenders under the Sheridan II Subordinated Term Loan Facilities (the ‘Sheridan II Subordinated Term Lenders’ and, together with the Senior Secured Lenders, the ‘Lenders’)….Over the course of six months leading up to the Petition Date, the Debtors and Lenders engaged in hard-fought, good-faith negotiations around the terms of the Plan.
The RSA and Plan contemplate that the restructuring transactions will involve the equitization of the vast majority of the Sheridan II secured and unsecured debt (the ‘Equitization Restructuring’), unless the Debtors, with the consent of a specified threshold of the Senior Secured Lenders, agree to sell all or substantially all their assets to a third-party purchaser pursuant to the Plan (the “Asset Sale Restructuring”). If the restructuring transactions are consummated through the Equitization Restructuring, the Debtors’ corporate structure will be streamlined under a single holding company, New Sheridan, owned by the current Lenders, which holding company, either directly or through one of its subsidiaries, will acquire all of the assets of the Debtors. Whether confirmed and consummated through the debt-for-equity transaction or a sale transaction, the Plan will resolve these Chapter 11 Cases, will cut off the expense of bankruptcy, and will permit the Debtors to distribute value to their stakeholders in a timely manner. Alternatively, and to ensure the restructuring transactions maximize value for all stakeholders, the Plan includes a sale “toggle” feature, allowing for a potential Asset Sale Restructuring if supported by the Required Consenting Secured Lenders (as defined in the Plan) and accomplished through the Plan. In parallel with the restructuring negotiations, the Debtors, with the assistance of their advisors, and at the request of the Senior Secured Lenders, commenced an exhaustive marketing process for a going-concern sale in connection with a potential Asset Sale Restructuring."
The Debtors’ Disclosure Statement [Docket No. 9] provides the following Plan summary:
“The Plan contemplates the following stakeholder recoveries:
- Holders of Administrative Claims and Other Priority Claims will receive payment in full in cash;
- Holders of Allowed DIP Claims will receive either:
- if the DIP Lender holds an Allowed New Money DIP Claim: (i) in an Equitization Restructuring, a Pro-Rata share of Tranche A of the First-Out/Second-Out Exit Facility; or (ii) in an Asset Sale Restructuring, payment in full in cash; and
- if the DIP Lender holds an Allowed Roll-Up DIP Claim: (i) in an Equitization Restructuring, a Pro-Rata share of Tranche B of the First-Out/Second-Out Exit Facility; or (ii) in an Asset Sale Restructuring, payment in full in cash;
- Sheridan II Revolving Lenders and Sheridan II Term Lenders will receive either: (i) in an Equitization Restructuring, their ratable share of (a) Tranche C of the Last-Out Exit Facility and (b) 95% of the New Common Stock; or (ii) in an Asset Sale Restructuring, their ratable share of the sale proceeds up to the allowed amount of their claims, less the sale proceeds given to junior stakeholders;
- Sheridan II Subordinated Term Lenders will receive either: (i) in an Equitization Restructuring, their ratable share of5% of the New Common Stock; or (ii) in an Asset Sale Restructuring, their ratable share of $9,000,000 of the sale proceeds; and
- General Unsecured Claims will be Reinstated or otherwise receive payment in full in cash.
Given the overwhelming support for the Debtors’ restructuring, the Debtors elected to pursue a prepackaged restructuring to maximize value by minimizing both the costs of restructuring and the impact on the Debtors’ businesses. Accordingly, the RSA contains certain milestones, including securing an order confirming the Plan by November 14, 2019, and the incurrence of the Effective Date by December 17, 2019. The Debtors believe they can confirm a plan of reorganization and emerge from chapter 11 within these time periods without prejudicing the ability of any parties to assert their rights in these Chapter 11 Cases.”
Events Leading to the Chapter 11 Filing
The Debtors' Disclosure Statement describes the Debtors' financial distress solely in the context of macro-economic and geo-political terms, joining an unhappy club of over 100 companies who have succumbed to price pressures since 2015, laying the onus for the Chapter 11 filings largely at the feet of OPEC and shale. The Debtors gloomily note not all the fallen 100, but also point out that there remain many more on the edge of the Chapter 11 precipice. The Debtors state:
"Oil and natural gas prices have declined substantially since 2014. The difficulties faced by the Debtors are consistent with those faced industry-wide….Among the factors causing such volatility are the domestic and foreign supply of oil and natural gas, the ability of members of the Organization of Petroleum Exporting Countries ('OPEC') to comply with the agreed upon production cuts and the cooperation of other producing countries to reduce production levels, social unrest and political instability, particularly in major oil and natural gas producing regions outside the United States, and the levels and growth of domestic and global economic activity. In particular, the U.S. ‘Shale Revolution’—the implementation of horizontal drilling and hydraulic fracking techniques to unlock oil and natural gas from previously non-producible shale formations—has resulted in a dramatic increase in U.S. crude oil and natural gas production, greatly increasing supplies at a time of uncertain demand.
Although prices have recovered somewhat from their lows at the beginning of 2016, NYMEX futures curves for both natural gas and crude oil indicate an expectation among traders in the derivatives market that these commodity prices are expected to decline over the next several years. These market conditions have affected oil and gas companies at every level of the industry around the world. Although all companies in the oil and gas industry have been affected at some level, independent oil and gas companies such as Sheridan II have been especially hard-hit, as their revenues primarily are generated from the sale of unrefined oil, natural gas, and NGLs. Over 100 oil and gas companies have filed for chapter 11 since the beginning of 2015, including, most recently, Halcon Resources, Legacy Reserves, White Star Petroleum, Vanguard Natural Resources, Inc., Rex Energy Corporation, EV Energy Partners, LP, Fieldwood Energy LLC, Stone Energy Corporation, Parker Drilling Company, Gastar Exploration, Inc., EXCO Resources, Inc., Bonanza Creek Energy, Inc., Memorial Production Partners LP, Seadrill Limited, and Cobalt International Energy Inc. Numerous other oil and gas companies have defaulted on their debt obligations, negotiated amendments or covenant relief with creditors to avoid defaulting, or have effectuated out-of-court restructurings. The current volatility in the commodity markets has made it especially difficult for some companies to execute on any viable out-of-court restructuring alternatives.
The Debtors were not immune to these macroeconomic forces."
Pre-Petition Capital Structure
As of June 28, 2019,the Debtors had approximately $1.1 billion of funded debt, consisting of:
- three first-lien revolving credit facilities with approximately $66.0mn in aggregate principal outstanding (the “Sheridan II Revolving Credit Facilities”);
- three first-lien term loan credit facilities with approximately $543.1mn in aggregate principal outstanding, which share an equal lien with the Sheridan II Revolving Credit Facilities (the “Sheridan II Term Loan Facilities”); and
- three unsecured subordinated credit facilities with approximately $495.5mn in aggregate principal outstanding (the “Sheridan II Subordinated Term Loan Facilities”).
About the Debtors
The Debtors are a Houston-based oil and gas company dedicated to acquiring and exploiting a balanced portfolio of mature producing properties in onshore basins in the United States. The majority of properties are operated through Sheridan Production Company, LLC.
The Debtors operate mature producing properties in Oklahoma, New Mexico, Texas and Wyoming and state that their "operational philosophy is to strive for excellence in production management, recovery enhancement and environmental care. Our management team actively oversees day-to-day operation of company properties by our team of highly experienced field personnel. Our staff of experienced geologists and reservoir, production and facilities engineers identify and expeditiously execute cost-effective reinvestment opportunities to maximize production and extend the commercial life of our fields."
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