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Southland Royalty Company LLC – NGL Commodity Prices, Slashed Credit Facility Borrowing Headroom and Onerous Contracts Force Upstream Energy Company to Seek Chapter 11 Shelter


January 27, 2020 − Privately-held Southland Royalty Company LLC  (“Southland” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10158. The Debtor, an independent upstream energy company headquartered in Fort Worth, is represented by M. Blake Cleary of Young Conaway Stargatt & Taylor, LLP. Further board-authorized engagements include (i) Shearman & Sterling LLP as general bankruptcy counsel, (ii) AP Services, LLC (ie Alix Partners) as interim management services provider, including responsibilities for a Chief Restructuring Officer and Chief Administrative Officer, (iii) PJT Partners Inc. as investment banking advisor and (iv) Epiq Corporate Restructuring, LLC as claims agent.

The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Halliburton Energy Services ($11.3mn trade debt), (ii) Nabors Drilling Technologies ($3.8mn trade debt) and (iii) Wamsutter LLC ($3.1mn trade debt).

Chapter 11 Objectives

The Declaration (defined below) states” “Resolving the Debtor’s liquidity and returning to profitability requires a right-sizing of its capital structure and fixed costs of production relative to its revenue-generating capacity in the current market. The Debtor filed this case to facilitate a restructuring, either through a sale of its business free and clear of liabilities to a purchaser who can give it a fresh start, or, if an attractive sale is not attainable, by de-leveraging its balance sheet through a chapter 11 plan.”

Equity Ownership

The Debtor was formed as a Delaware limited liability company in February 2015 as a joint venture among EnCap Energy Capital Fund IX, L.P., EnCap Energy Capital Fund X, L.P. (together, the “EnCap Entities”) and MorningStar Partners, L.P. (“MorningStar”). Southland is indirectly owned by the EnCap Entities (80%) and MorningStar (20%) through Southland Holdings, LLC and Southland Royalty, L.P. (the Debtor’s sole member).  Please see the structure chart below.

Prepetition Debt

As of the Petition Date, the Debtor has $540.0mn in total funded debt obligations outstanding, all of it under a prepetition RBL facility (the "Credit Facility") governed by a March 31, 2015 Credit Agreement, (the “Prepetition RBL Credit Agreement”) by and among the Debtor, Citibank, N.A., as administrative agent (the "Agent") and Citigroup Global Markets Inc., BMO Harris Bank N.A., Barclays Bank PLC, Capital One, National Association, and UBS Securities LLC as joint lead arrangers. 

It is a reserve-based revolving credit facility in the original amount of up to $1.0bn, subject to a borrowing base which is re-determined semiannually in April and October. The amount of the borrowing base depends on the volumes of proved oil and natural gas reserves, pricing and estimated cash flows from these reserves, as well as other factors evaluated by the Agent. In December 2019, the Debtor had fully borrowed $540.0mnn under the Credit Facility, however, the borrowing base was reduced to $400.0mn. In accordance with the terms of the Credit Facility, the Debtor elected to repay the deficiency over a period of approximately six months. The first such installment, in the amount of approximately $23.0mn, was due January 22, 2020. The Debtor did not make this payment.…[T]he Agent and Lenders agreed to forbear from defaults arising as a result of this missed payment.

The Credit Facility indebtedness matures on November 30, 2023, and bears non-default interest at LIBOR plus an applicable margin ranging from 1.75% to 2.75%. The Credit Facility requires that it be secured by liens on at least 95% of the total value of the Debtor’s proved reserves and by first priority, perfected liens and security interests on substantially all other assets.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Declaration”), Frank A. Pometti, the Debtor's Chief Restructuring Officer detailed the events leading to Southland's Chapter 11 filing; culminating in the reduction of the Credit Facility borrowing base and the ensuing inability to make timely deficiency payments noted above.. The Declaration states: "The sustained downturn in the oil and gas sector has created an extremely challenging environment for the Debtor’s business, depressing revenues generated by production activities, while at the same time reducing the value of proven reserves. As a result of these trends, the borrowing base on the Debtor’s senior secured revolving credit facility… was re-determined and reduced on December 23, 2019, causing an accelerated repayment schedule.

At its core, the distress in the industry is a function of commodity prices and the decades-long disruption caused by hydraulic fracturing and horizontal drilling. And while it is commonly understood that oil and gas prices have remained relatively low in comparison to prices before 2015, less appreciated is the recent decline in gas pricing.

Commodity pricing pressures have resulted in materially reduced cash flow, while simultaneously decreasing the value of the Debtor’s proven reserves. For the Debtor, the dip in NGL prices has been especially dire: realized NGL pricing for the San Juan and Wamsutter field has declined approximately 70% from the third quarter of 2018."

In addition to issues relating to commodity prices, the Debtor has been caught out by minimum volume commitments ("MVC") contained in gathering agreements and is involved in protracted litigation with BP over land leased by BP which has hamstrung the Debtors on several fronts. The MVC issues are particularly worrisome as the Debtors calculate that annual MVC deficiency payments under a pair of contracts with Wamsutter LLC (“Williams”) are anticipated to be approximately $28.0mn in 2020 with that doubling to $72.0mn by 2023. The Declaration notes "potential MVC deficiency payments due over the lifetime of the Williams Agreements could be as high as $895 million on an undiscounted basis." Fair to say, that the Debtor will be looking to shed these obligations in bankruptcy.

About the Debtor

The Debtor is a privately-held independent upstream energy company focused on the acquisition, development and exploitation of oil, natural gas and natural gas liquid (‘NGL’) reserves in North America. Headquartered in Fort Worth, it conducts its business across four states, with the majority of operations in Wyoming and New Mexico. The Debtor owns a unique land position comprised of leasehold and mineral interests in approximately 745,000 net working interest acres across both the Wamsutter field (‘Wamsutter’) of the Greater Green River Basin in southwestern Wyoming and the San Juan Basin (‘San Juan’) in southwestern Colorado and northwestern New Mexico, including approximately 150,000 net working interest mineral acres in the Wamsutter field.

The Debtor has no employees and outsources all functions of asset management, pursuant to that certain Management Services Agreement, dated as of February 9, 2015, by and between Southland and MorningStar (as amended from time to time, the “MSA”).

Corporate Structure Chart

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The post Southland Royalty Company LLC – NGL Commodity Prices, Slashed Credit Facility Borrowing Headroom and Onerous Contracts Force Upstream Energy Company to Seek Chapter 11 Shelter appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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