March , 2020 – CARBO Ceramics, Inc. and two affiliated Debtors (Formerly NYSE "CRR" and currently OTCQB “CRRT,” “CARBO” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-31973. The Debtors, a manufacturer of ceramic products (notably ceramic proppant used in fracing) for the oil and gas, industrial, and environmental markets, are represented by Paul E. Heath of Vinson & Elkins LLP. Further board-authorized engagements include (i) Okin Adams LLP as special bankruptcy counsel, (ii) Perella Weinberg Partners L.P. and Tudor Pickering, Holt & Co. (collectively, “PWP”) as investment banker (iii) FTI Consulting, Inc. (“FTI”) as financial advisors, (iv) Ernst & Young LLP, KPMG LLP and Weaver and Tidwell, L.L.P. as accountants and tax advisors and (v) Prime Cleerk LLC as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $500.0mn and $1.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Midwest Propant, LLC ($820k disputed trade debt), (ii) Greenbrier Management Services ($664k trade debt) and (iii) Well Site Supply, Inc. ($363k disputed trade debt)
In a press release announcing the filing, the Debtors advised that they had “reached an agreement with Wilks Brothers, LLC and Equify Financial, LLC (together, the 'Wilks Brothers') under which the Wilks Brothers will acquire the Company through a debt-for-equity exchange pursuant to a plan of reorganization in a Chapter 11 bankruptcy case."
Wilks Brothers is managed by Farris and Dan Wilks who sold a Texas fracking company in 2011 for a reported $3.5bn, but have since seen a number of the energy companies in their investment portfolio file for bankruptcy protection including Approach Resources Inc., Alta Mesa Resources Inc. and Halcon Resources Corp.
Chapter 11 Objectives
According to the Bautista Declaration (defined below), the Debtors intend " to implement a consensual reorganization with the support of their prepetition secured lenders, Wilks Brothers, LLC ('Wilks') and Equify Financial, LLC ('Equify,' and together with Wilks, the 'Prepetition Secured Lenders”), that will, among other things, right-size the Company’s balance sheet by converting all of its secured debt into equity in the reorganized Debtors and eliminating burdensome lease obligations."
Restructuring Support Agreement (see also 8-K)
On March 28, 2020, the debtors entered into a Restructuring Support Agreement (the “RSA”) with the holders of 100% of the aggregate principal amount of loans outstanding under their Amended and Restated Credit Agreement, dated as of March 2, 2017, as amended (the “Credit Agreement”), amongst CARBO, as borrower, AGPI and StrataGen, as guarantors, Wilks Brothers, LLC, as administrative agent and lender (“Wilks”), and Equify Financial, LLC, as lender (“Equify,” and together with Wilks, the “Supporting Lenders”).
Pursuant to the terms and conditions of the RSA:
- each Supporting Lender will receive its pro rata share of 100% of the equity interests in a reorganized CARBO entity (“Reorganized CARBO”) in exchange for such Supporting Lender’s secured claims under the Credit Agreement and the DIP Facility described below, except to the extent such DIP Facility claims (the “DIP Facility Claims”) are converted into borrowings under the Exit Facility described below, with Reorganized CARBO retaining 100% of the equity interests in a reorganized AGPI entity and a reorganized StrataGen entity;
- a liquidating trust will be established for the benefit of general unsecured creditors, to which the Supporting Lenders will contribute $100,000 to fund the costs of administering such trust, and any avoidance actions that are not otherwise released under the Plan will be transferred to such trust; and
- CARBO’s existing equity will be cancelled.
The Wilks Brothers (or "Wilks") have committed to providing $15.0mn in debtor-in-possession ("DIP") financing and consented to the use of its cash collateral.
Borrowings under the senior secured superpriority multiple draw term loan facility (the “DIP Facility”) will mature on the date that is five months after the date of filing of the Chapter 11 Cases and will bear interest at a rate of 8.00% per annum. Upon the Company RSA Parties’ emergence from the Chapter 11 Cases and at the election of the lenders under the DIP Credit Agreement, all of a portion of the DIP Facility Claims may be converted into interests in Reorganized CARBO or borrowings under a new exit credit facility with Reorganized CARBO (the “Exit Facility”).
The Debtors are party to the Credit Agreement noted above. As of the Petition date, the principal amount of the Debtors’ funded debt under this facility was approximately $65.0mn (excluding accrued interest and make-whole amounts). In June of 2019, a portion of the loan was transferred by Wilks to Equify, an affiliate of Wilks, and Equify made an additional loan of approximately $14.0mn. Following these transactions, the $65.0mn of indebtedness under this facility is split between Wilks holding approximately $33.0mn and Equify holding approximately $32.0mn (the “Prepetition Secured Debt”).
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Bautista Declaration”), Ernesto Bautista III, CARBO's Vice President and Chief Financial Officer detailed the events leading to CARBO’s Chapter 11 filing. For these Debtors, whose revenues have been largely based on ceramic proppant products, the protracted downturn in oil and gas prices has been particularly acute. Ceramic proppants are more expensive (with good reason given their increased effectiveness, the Debtors argue) than their sand-based alternatives. Since 2014, however, "cost slashing" clients have turned to sand-based proppants (and locally sourced "in basin" sand proppants). The result has been that revenues from base ceramic media, the Debtors "dominant source of revenue" fell from approximately $530.0mn to approximately $34.0mn in the 2014-2019 period.
The Bautista Declaration states: "Beginning in late 2014, a severe decline in oil prices and continued decline in natural gas prices led to a significant decline in oil and natural gas drilling activities and capital spending by E&P companies. While modest price recoveries have occurred intermittently since that time, prices have generally remained depressed and recently fell precipitously again to near record low levels.
The Company’s financial performance is directly impacted by activity levels in the oil and natural gas industry. A downturn in oil and natural gas prices and sustained headwinds facing the E&P industry have resulted in both reduced demand for the Company’s products and services and reduced prices the Company is able to charge for those products and services.
Because drilling activity has been reduced over a protracted period of time, demand for all of the Company’s products and services (proppant, in particular) has been significantly depressed. Throughout the Company’s history, base ceramic media was the dominant source of its revenue. From 2014 to 2019, the Company’s total revenue for base ceramic media fell from approximately $530 million to approximately $34 million.
The historically low prices for oil and natural gas not only reduced activity levels and demand, but also precipitated a movement among producers to slash costs. Most notably, the drive by producers to reduce their drilling and completion costs in order to generate better returns on capital and free cash flow to investors resulted in the widespread substitution of raw sand for ceramic proppant in completion operations (other than for the most challenging applications). As this trend accelerated, producers began substituting sand sourced locally near the well site, known as “in basin” sand, for better grades of sand, such as the “northern white” sand produced by the Company in Wisconsin. These trends have continued in 2019 and 2020, as producers remain under pressure from investors, notwithstanding the superior performance results of the Company’s products. These events, along with an oversupplied ceramic proppant market and depressed oil and natural gas prices, have kept demand and average prices low for the Company’s proppants."
Corporate Structure Chart
About the Debtors
The Debtors manufacture and sell ceramic technology products and services, base ceramic proppant, and frac sand for both the oilfield and industrial sectors. The manufacturing processes of various ceramic products are similar, but the products’ technology features and characteristics vary based on the application for which they are intended to be used. As discussed below, the primary use for ceramic proppant is assisting the hydraulic fracturing process by “propping” open oil and gas wells to maximize hydrocarbon flow and production in the most efficient manner. Historically, the ceramic technology products and services business was by far the largest segment of the Company’s business.
According to the Debtors: "CARBO® is a global technology company that provides products and services to several markets, including oil and gas, industrial, agricultural, and environmental markets to enhance value for its clients.
CARBO Oilfield Technologies – is a leading provider of market-leading technologies to create engineered production enhancements solutions that help E&P operators to design, build and optimize the frac – increasing well production and estimated ultimate recovery, and lower finding and development cost per barrel of oil equivalent.
CARBO Industrial Technologies – is a leading provider of high-performance ceramic media and industrial technologies engineered to increase process efficiency, improve end-product quality and reduce operating cost. CARBO has world class manufacturing expertise. We bring new products to market faster to meet client demands.
CARBO Environmental Technologies – is a leading provider of spill prevention and containment solutions that provide the highest level of protection for clients' assets and the environment in oil and gas and industrial applications. Our range of innovative products feature a proprietary polyurea coating technology that creates a seamless, impermeable, maintenance-free layer of protection."
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