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Sheridan Holding Company I, LLC – Warburg Pincus Backed Energy Funds File Prepackaged Chapter 11, Will Ask Court to Confirm Plan (and $470mn Debt Reduction) at March 24th Confirmation Hearing


[To be updated] March 23, 2020 – Sheridan Holding Company I, LLC  and six affiliated Debtors (“Sheridan I” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-31884. The Debtors, oil and gas focused investment funds backed by Warburg Pincus, are represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further board-authorized engagements include (i) Kirkland & Ellis as general bankruptcy counsel, (ii) Alix Partners LLP as financial advisors, (iii) Evercore as investment banker and (iv) Prime Clerk 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. 

Goals of the Chapter 11

The Stewart Declaration (defined below) states: "The Debtors commenced these chapter 11 cases to implement this restructuring through a prepackaged plan of reorganization (the ‘Plan’) [which] reduces the Debtors’ prepetition debt by approximately $470 million, deleverages their balance sheet, provides a four-year path for an orderly disposition of the Debtors’ oil and gas assets, and leaves trade creditors unimpaired." As discussed further below, the Debtors cite the impact of sustained lower oil and gas prices and the particularly acute impact of the "shale revolution" on independent oil and gas companies as key factors in the diminished performance and value of their investments properties.

A Plan confirmation hearing is scheduled for February 24th.

Overview of the RSA and the Plan

The RSA and Plan contemplate an equitization of the majority of the Sheridan I secured debt through the issuance of the New Sheridan Equity, subject to dilution by the New Warrants issued to limited partner equity holders, and a $150 million take-back exit facility (the “Exit Facility”).Limited partners will receive the New Warrants exercisable into 25% of the number of shares of the New Sheridan Equity issued and outstanding on the Effective Date, on the terms set forth in the New Warrant Term Sheet, in exchange for the release by such limited partners of the Debtors, Secured Lenders, Manager Parties, and other parties and their affiliates and related parties, as further set forth in the Plan. Following emergence, the Debtors’ corporate structure will be streamlined under a new holding company, New Sheridan, owned by the current Secured Lenders, which holding company, either directly or through one of its subsidiaries, will acquire all of the assets of the Debtors. The Reorganized Debtors shall seek bids for the sale of certain asset packages in accordance with milestones under the Exit Facility to facilitate an orderly wind-down of the Debtors’ assets.

The Plan contemplates the following stakeholder recoveries:·

  • Holders of Administrative Claims and Other Priority Claims will receive payment in full in cash;·
  • Sheridan I Revolving Lenders and Sheridan I Term Lenders will receive (i) new term loans under the Exit Facility, (ii) New Sheridan Equity (subject to dilution by the Warrant Shares), and (iii) the Excess Balance Sheet Cash, if any; 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 an expedited prepackaged restructuring to maximize value by minimizing both the costs of restructuring and the impact on the Debtors’ businesses. The Debtors anticipate commencing the Chapter 11 Cases on or March 24, 2020, and requesting confirmation of the Plan on the same day, or as soon as reasonably practicable thereafter. The Debtors intend to file motions to avoid the need for schedules of assets and liabilities and statements of financial affairs, which will provide them with significant cost savings. Accordingly, the RSA contains certain milestones, including both securing confirmation of the Plan and the occurrence of the Effective Date by March 31, 2020 and additional milestones as set forth herein. The timeline from the submission of this Disclosure Statement to the anticipated confirmation hearing provides all parties in interest a full and fair opportunity to participate in the process.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Stewart Declaration”) [Docket No. 5], Lisa A. Stewart, the Debtors' Executive Chairman, President, Chief Investment Officer, and Chief Executive Officer, detailed the events leading to the Debtors' Chapter 11 filing. The Stewart Declaration states: "For the year ended December 31, 2019, the Debtors reported $116 million of total revenue, down from $152 million of total revenue in 2018. 

The Debtors’ businesses recently have come under significant pressure stemming from the steep decline in the oil and gas industry in late 2014. The lack of a sustained market recovery and corresponding volatility in commodity prices negatively impacted the expected cash flow from the Debtors’ oil and gas properties, which were acquired prior to the downturn in 2014.Current and future commodity prices—which oil and gas industry analysts expect to trend downward—also have a significant impact on the Debtors’ reserves and overall asset value. The volatile commodities market as well as the failure of a major asset sale to close resulted in the Debtors being unable to refinance the Sheridan I RBL Facilities in advance of their May 2019 maturities."

The Disclosure Statement adds: "Oil and natural gas prices have declined substantially since 2014. The difficulties faced by the Debtors are consistent with those faced industry-wide. Historically, the markets for oil, natural gas and natural gas liquids (‘NGLs’) have been volatile, and they likely will continue to be volatile, especially given current geopolitical and economic conditions. 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 fracing 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 I have been especially hard-hit, as their revenues primarily are generated from the sale of unrefined oil, natural gas, and NGLs".

Prepetition Debt

As of December 31, 2019, the Debtors have approximately $616.1mn of funded debt, consisting of:

  • three first-lien revolving credit facilities with approximately $167.1mn in aggregate principal outstanding (the “Sheridan I RBL Facilities”); and
  • three first-lien term loan credit facilities with approximately $449.0mn in aggregate principal outstanding, which share an equal lien with the Sheridan I RBL Facilities (the “Sheridan I Term Loan Facilities”).

The following documents were attached to the Disclosure Statement

  • Exhibit A: Plan of Reorganization
  • Exhibit B: RSA 
  • Exhibit C: Financial Projections
  • Exhibit D: Valuation Analysis
  • Exhibit E: Liquidation Analysis

 Corporate Structure Chart

About the Debtors

The Debtors are part of the broader Sheridan Group, which was established in 2006 by oil and gas executives with Warburg Pincus LLC (‘Warburg Pincus"), a private equity firm, as the co-sponsor. Headquartered in Houston, Texas, Sheridan I comprises the first of three series of private-placement investment funds managed by Sheridan Production Partners Manager, LLC ("Manager").Sheridan I consists of three sub-funds, each intended for a different type of investor: taxable entities; tax-exempt entities; and members of Warburg Pincus and the Sheridan Group management team.

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The post Sheridan Holding Company I, LLC – Warburg Pincus Backed Energy Funds File Prepackaged Chapter 11, Will Ask Court to Confirm Plan (and $470mn Debt Reduction) at March 24th Confirmation Hearing appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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