November 8, 2019 − Arsenal Resources Development LLC and 16 affiliated Debtors (“ARD” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12347. The Debtors, an independent exploration and production company engaged in the acquisition and development of unconventional natural gas resources in the Appalachian Basin, are represented by Pauline K. Morgan of Young Conaway Stargatt & Taylor, LLP. Further board-authorized engagements include (i) Simpson Thacher & Bartlett LLP as general bankruptcy counsel, (ii) PJT Partners LP as investment banker, (iii) Alvarez & Marsal North America, LLC, as financial advisor and (iv) Prime Clerk as claims agent. For Young Conaway; Simpson Thacher; and Prime Clerk this is the second time working together for this client.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn (documents filed more specifically referencing $507.0mn in funded debt). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Chambers Energy Capital II, LP ($239.6mn term loan debt), (ii) LR-Mountaineer Holdings L.P. ($133.4mn note) and (iii) Columbia Gas Transmission, LLC ($13.0 trade debt). The first two claims are partially secured with the unsecured element listed as "undetermined." The rest of the list of top 30 unsecured creditors is comprised of trade debt claims, the smallest of which is $353k and 10 of which are in excess of $1.0mn.
For the Debtors this is deja vu all over again, having emerged from an earlier pre-packaged Chapter 11 as recently as February 2019. In that instance, it was affiliate Debtor Arsenal Energy Holdings (f/k/a Mountaineer Energy Holdings) that sough bankruptcy protection, emerging off the back of a recapitalization which included (i) the equitization of more than $860.0mn of subordinated notes and (ii) new credit facilities including" " a new term loan facility in an original principal amount of $220 million (the ‘New Term Loan Facility’) and a new reserve based revolving loan facility with an initial aggregate commitment of $135 million and an aggregate commitment of $145 million after the completion of the Recapitalization (the ‘New RBL Facility’)' [cited from the then Debtor's Disclosure Statement]. One will recognize the term loan debt as being included in the list of the Debtors' current list of secured/partially secured creditors listed above.
The first Chapter 11 took only 9 days to complete; an accomplishment that (having now been almost as quickly followed by a Chapter 22) will undoubtedly lead to some discussion as to the role of the new wave of superfast prepacks; on the one hand distressed companies (and their creditors) benefiting from a cheaper and less disruptive Chapter 11 (the benefits arguably carrying through to these filings) but on the other hand clearly drawing into question the parameters of the first reorganization and whether they were rushed. This time around, the Debtors are taking things a bit slower, aiming to emerge on new year's eve minus $400.0mn in debt and resolving to avoid a three-peat. For those wondering, yes, Punxsutawney, Pennsylvania of groundhog day fame sits in the Appalachian Basin, an hour's drive from the Debtors' Wexford, Pennsylvania headquarters up route 85.
Overview of the Plan and Restructuring Support Agreement
The Debtors' Disclosure Statement provides: "On November 6, 2019, the Company and all of its principal lenders in the Company’s three tranches of debt, as well as a majority of its existing equity holders (collectively, the 'Consenting Stakeholders'), executed a Restructuring Support Agreement (the 'RSA') pursuant to which the Consenting Stakeholders agreed, among other things, to support and/or vote in favor of the Joint Pre-Packaged Plan of Reorganization (the 'Plan') filed on the Petition Date.
As contemplated by the RSA, on November 7, 2019, the Company solicited votes on the Plan, and the Seller Noteholders and Term Loan Lenders (the only creditors entitled to vote on the Plan) voted unanimously in favor of the Plan.In light of that consensus, the Debtors commenced these chapter 11 cases (the 'Chapter 11 Cases') on November 8, 2019 (the 'Petition Date'). Similar to the First Recapitalization, the Plan and RSA contemplate that the OpCo Debtors’ employees, vendors, suppliers and other trade creditors will be paid in the ordinary course of business. With regard to the recapitalization component of the Plan, the RSA and the Plan provide for a substantial deleveraging of the Company’s balance sheet (an estimated debt reduction of over $400 million in principal amount), upon consummation of the following capital transactions:
- a commitment from the existing RBL Lenders to provide a $90 million debtor-in-possession facility (the 'DIP Facility'), and a $130 million exit facility (the 'New RBL Facility');
- the conversion of over $360 million in principal amount of prepetition secured debt into 100% of the equity of the reorganized Debtors (subject to dilution by the New Capital Commitment); and
- the commitment from Chambers and Mercuria to recapitalize the Debtors via a new $100 million equity investment (the 'New Capital Commitment')."
Pre-Petition Funded Debt
As at the Petition date, Debtors’ capital structure included the following principal amount of funded debt (totalling, giving effect to rounding, $506.0mn):
|
Indebtedness |
Approximate Outstanding Principal Amount |
|
RBL Facility |
$117.0mn (plus an approximate $28.0mn outstanding letter of credit) |
|
Term Loan Facility |
$233.0mn (including interest and fees that have been paid-in-kind and capitalized) |
|
Seller Notes |
$128.0mn (including interest that has been paid-in-kind and capitalized) |
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Goetz Declaration”) [Docket No. 3], Allen Goetz, the Debtors' Chief Financial Officer, detailed the events leading to ARD's Chapter 11 filing. The Goetz Declaration provides:
"Like other similarly situated exploration & production ('E&P') companies, during fiscal year 2018 the Company found itself in a financially untenable position largely caused by declining gas prices. Consequently, it negotiated a significant recapitalization transaction with its key financial stakeholders.
On February 14, 2019, AEH consummated a standalone restructuring through a pre-packaged plan of reorganization (the ‘Prior Plan’) that exchanged more than $860 million of subordinated debt for a majority of the equity of reorganized AEH.
…the Prior Plan was the final step in the First Recapitalization transaction which, in addition to equitizing the subordinated debt under the Prior Plan, included the Company (a) obtaining $110 million of new capital, (b) refinancing the 2014 Credit Facilities, and (c) entering into the Joint Development Agreement (components (a) through (c) were effectuated consensually out of court prior to consummation of the Prior Plan).
Despite the Company’s efforts, it was unable to consensually amend any of the Gathering Agreements in connection with the First Recapitalization.
After the First Recapitalization, the Company’s business plan contemplated pursuing an active development program in targeted areas located in Eastern Harrison, Western Taylor and Northern Barbour counties, which are referred to as the ‘Simpson’ areas. The Joint Development Agreement gave the Company access to additional funding to pursue this program, with the intent of filling unutilized transportation capacity and satisfying the Company’s MVCs through the increase in production.
As of October 31, 2019, the Company had drilled 18 wells, completed 11 wells, and started producing from 8 wells. In addition, the Company completed construction of the following two critical infrastructure projects: (1) the Company’s first gathering line in Eastern Harrison County, West Virginia, which provides pipeline access to 11 wells on the Pritt North and South pads and acts as the first link in the Company’s ‘Simpson’ gathering system and (2) the Neptune water pipeline, which is an approximate 17 mile, 20” water pipeline that extends through the Company’s western acreage position and will provide fresh water for future completion activities.
As a result of drilling and the proved developed producing reserve growth, the Company anticipated increasing its availability under the RBL Facility by growing the ‘borrowing base’. Upon achieving those results, the Company expected that it would be in a position to use the additional borrowing capacity to further expand its drilling program and continue to grow its producing production base.
Unfortunately, notwithstanding these achievements, the Company’s business plan was frustrated by two significant factors: (1) a significant drop in natural gas realized prices, which led to a material decline in revenue, and (2) a decline in the strip price curve as well as bank pricing to determine the borrowing base, which led to a stagnating borrowing base under the RBL Facility and constrained liquidity.
Moreover, the Company was unable to amend a gas marketing agreement, which would have freed up approximately $28 million of availability under the RBL Facility by replacing the outstanding TCO letter of credit currently issued under the RBL Facility. Without access to this additional liquidity, and due to lower commodity prices, the Company curtailed its drilling program, which created strain on the Company’s forecast and further limited the Company’s access to capital.
As a result, despite the Debtors’ substantial efforts to reduce long-term debt, access new sources of capital and expand their drilling program through the First Recapitalization and the Prior Plan, the Debtors’ obligations under their existing debt facilities and the Gathering Agreements became unsustainable. Concurrently, the decline in commodity prices and resulting impact on revenue led to a dramatic reduction in the Company’s liquidity.
Proposed Key Dates
- Plan/Disclosure Statement Objection Deadline: December 11, 2019
- Combined Hearing on Disclosure Statement/Confirmation: December 18, 2019
- Plan Effectiveness: December 31, 2019
About the Debtors
The Debtors are an independent exploration and production company engaged in the acquisition and development of unconventional natural gas resources in the Appalachian Basin. The Debtors conduct operations through certain operating subsidiaries owned, directly and indirectly, by Arsenal Resources Development LLC (“ARD”, together with its wholly-owned subsidiaries, the “OpCo Debtors”).
One or more of the OpCo Debtors employs the Company’s workforce, owns the Company’s working interests and corresponding infrastructure, and produces and markets gas for sale. Accordingly, all of the Company’s vendors, suppliers and other trade creditors contract with one or more OpCo Debtors.
The Debtors' website adds: "Arsenal Resources is headquartered in Pittsburgh, with office locations in West Virginia. We live where we work, strategically focusing on dry natural gas assets in the Southern Appalachian Basin.
Following the initial 2011 purchase of 50,000 acres in West Virginia, our company embarked on a series of successful natural-gas operations in which we increased production performance by 40 percent, while reducing cost-per-foot by 44 percent.
Building upon this conspicuous success, we strategically explored additional acquisition opportunities, ultimately increasing our core position to approximately 208,000 net acres."
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