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Arena Energy, LP – Gulf of Mexico Drillers File Prepackaged Chapter 11 with Almost $1.1bn of Funded Debt; Severely Impaired Senior Lenders Back Private Sale to Entity Formed by Debtors’ CEO and Lime Rock Partners

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August 20, 2020 – Arena Energy, LP and five affiliated Debtors (“Arena” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-34215. The Debtors, an "oil and gas finder" focused on the Gulf of Mexico shelf, are represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Evercore Group, L.L.C. as financial advisorsand investment banker, (iii) Alvarez & Marsal North America, LLC as restructuring advisors and (iv) Kurtzman Carson Consultants LLC as claims agent. 

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) United States Small Business Administration ($1.8mn loan), (ii) Energy Transfer Operating LP ($1.4mn trade claim) and (iii) Kinetica Midstream Energy, LLC ($170k trade claim).

Highlights

  • Gulf of Mexico "Oil Finder" Files Prepackaged Chapter 11 with $1.069bn of Funded Debt
  • Debtors Succumb to Combination of Hurricane Barry, COVID-19, Saudi-Russian "Price War" and (most importantly) Unsustainable Capital Structure
  • RSA has Support of 72.4% of the RBL Facility Claims (Recovery 10.3% to 19.9%) and 94% of the Term Loan Claims (up to 2.3%)
  • Private Sale to Debtors' CEO and Lime Rock Partners for $64.2mn Cash plus $60.0mn of "Contingent Value Payments" based on Oil Prices/WTI Index

Overview of the Prepackaged Plan and RSA

The Disclosure Statement provides: "Following considerable discussions with the RBL Facility Lenders regarding alternative restructuring strategies, and a robust marketing process by the Debtors’ investment banker, Evercore, the Debtors have reached an agreement-in-principle with the Consenting RBL Facility Parties and the Plan Sponsor [an entity created by the Debtors' co-founder, equityholder, and Chief Executive Officer, Mike Minarovic and Lime Rock Partners VIII, LP] regarding the terms of the RSA, dated as of August 19, 2020, a copy of which is attached [to the Disclosure Statement] as Exhibit B. Among other things, the RSA will obligate the Consenting RBL Facility Parties to vote to accept the Debtors’ ‘prepackaged’ plan and support the Plan Sponsor Transaction.

The primary purpose of the Plan is to implement the Plan Sponsor Transaction, pursuant to which the Plan Sponsor (or a designee thereof) shall acquire the business enterprise of the Debtors, including substantially all of the assets of the Debtors, in exchange for the consideration to be distributed to the Estates of the Debtors under the Plan.

The Plan contemplates the following stakeholder recoveries:

  • All outstanding and undisputed General Unsecured Claims against the Debtors will be paid in full in cash, Reinstated, or otherwise Unimpaired by the Plan and satisfied in the ordinary course of business; 
  • All Other Priority Claims and Other Secured Claims will be paid in full in cash, Reinstated, or receive such other treatment that renders such Claims Unimpaired under the Bankruptcy Code;
  • Each Holder of an Allowed RBL Facility Claim will receive its Pro Rata portion of: (a) the Plan Sponsor Cash Amount and (b) the RBL Contingent Value Rights; 
  • Each Holder of an Allowed Term Loan Claim shall receive its Pro Rata portion of the Term Loan Contingent Value Rights; 
  • Arena Energy, LP Interests, Arena Energy GP, LLC Interests, Arena Energy 2020 GP, LLC Interests, and Sagamore Hill Holdings, LP Interests shall be, at the election of the Plan Sponsor in its sole discretion, (a) canceled, released and extinguished or (b) otherwise treated as determined by the Plan Sponsor in its sole discretion, in either case without the Holders thereof receiving any distribution on account of such Interests;
  • Section 510(b) Claims will be canceled, released, and extinguished, and will be of no further force or effect; and 
  • All Intercompany Claims and Interests shall be, at the election of the Plan Sponsor in its sole discretion: (a) Reinstated; (b) compromised, distributed, contributed, set off, settled, canceled, released and/or extinguished, without any distribution on account of such Intercompany Claims or Interests; or (c) otherwise treated as determined by the Plan Sponsor in its sole discretion.

Given the strong 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. The Debtors believe they can confirm the Plan 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.

The Plan is supported by the Debtors, including the Transaction Committee, the RBL Facility Agent, Holders of approximately 72.4% of the RBL Facility Claims, Holders of approximately 94% of the Term Loan Claims, and the Plan Sponsor. "

Marketing of Debtors' Assets and Selection of Plan Sponsor

The Disclosure Statement provides a lengthy discussion of marketing efforts and negotiations with understandably unhappy senior lenders, including the following: "In the face of dwindling liquidity and no prospect of incremental capital, the Debtors had no choice but to try to sell their assets. The independent directors instructed Evercore to broadly and aggressively market the Debtors’ assets for sale. Thereafter, Evercore sent information to more than 900 prospective buyers and engaged in negotiations and discussions with more than 72 potentially interested parties.

As Evercore began its initial contact with potential bidders, it became apparent that co-founder, equityholder, and Chief Executive Officer, Mike Minarovic, or an entity affiliated with him, was interested in pursuing a bid for the Debtors’ assets, or making a new money investment in the Debtors’ business enterprise. Mr. Minarovic for some time had expressed interest in being part of the Debtors’ solution and had engaged separate advisors to interface with the Debtors in connection with their evaluation of various strategic options. As his interest crystallized, Mr. Minarovic and Lime Rock Partners VIII, LP formed the Plan Sponsor, which informed Evercore that it planned to submit a bid….

Following two rounds of competitive bidding, the Transaction Committee, with input from Evercore and Kirkland, determined that nearly all of the proposals received were defective in material respects, such as a lack of an operator, surety bonding commitments, and/or financial capital to consummate a transaction, with the exception of a proposal from the Plan Sponsor (the “Initial Plan Sponsor Proposal”). 

The Initial Plan Sponsor Proposal, which provided a $75 million cash purchase price that was subject to certain purchase price adjustments, was structured as a stalking horse bid that would set the floor for competing bids in a court-supervised auction process to be conducted in chapter 11 cases for the Debtors, and furthermore contained an acknowledgement that it was subject to higher or otherwise better bids submitted in connection with acceptable bidding procedures governing such auction. The Transaction Committee, after consulting with the RBL Facility Lenders, who indicated their support for the Initial Plan Sponsor Proposal, determined that the Initial Plan Sponsor Proposal was the best and highest proposal received and instructed Evercore and Kirkland to commence negotiations over a purchase and sale agreement and related documentation for the Initial Plan Sponsor Proposal. 

These negotiations ultimately resulted in a mutually agreeable alternative transaction based upon an improved proposal by the Plan Sponsor (the “Amended Plan Sponsor Proposal”). Importantly, the Amended Plan Sponsor Proposal provided all of the same structural benefits of the Initial Plan Sponsor Proposal highlighted above, but for significantly higher value and greater consideration to the Debtors’ estates, including 

(i) a cash purchase price of $64,157,079.00, which is not subject to any price adjustments,

(ii) up to $60,000,000 in contingent value payments to holders of RBL Facility Claims based on the trading price of oil on the West Texas Intermediate (“WTI”) index through 2024, and 

(iii) payment in full of all administrative, priority, and general unsecured claims (including all trade, vendor, and lienholder claims). 

In exchange for the increased consideration and improved terms in the Amended Plan Sponsor Proposal, which eliminated downside price risk for the Debtors and their estates as well as the risk of administrative insolvency and provided holders of RBL Facility Claims with rights to share in potential upside value,  the Plan Sponsor required a corresponding reduction of consummation risk, and therefore the Debtors and the RBL Facility Secured Parties agreed to consummate the sale to the Plan Sponsor contemplated under the Amended Plan Sponsor Proposal pursuant to a chapter 11 plan and without any further auction process.

The following is a summary of classes, claims, voting rights and expected recoveries (Defined terms are as in the Plan and/or Disclosure Statement):

  • Class 1 (“Other Priority Claims’) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $277,348.55 and the estimated recovery is 100%.
  • Class 2 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $434.04mn and the estimated recovery is 100%.
  • Class 3 (“RBL Facility Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $629.58mn and estimated recovery is 10.3% – 19.9%. On the Effective Date, each holder of an Allowed RBL Facility Claim shall receive, in full and final satisfaction of such Allowed RBL Facility Claim, its Pro Rata portion of (i) the Plan Sponsor Cash Amount and (ii) the RBL Contingent Value Rights.
  • Class 4 (“Term Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $439.07mn and estimated recovery is up to 2.3%. On the Effective Date, each Holder of an Allowed Term Loan Claim shall receive, in full and final satisfaction of such Allowed Term Loan Claim, its Pro Rata portion of the Term Loan Contingent Value Rights.
  • Class 5 (“General Unsecured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $2.30mn and the estimated recovery is 100%.
  • Class 6 (“Intercompany Claims”) is unimpaired/impaired, presumed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.
  • Class 7 (“Intercompany Interests”) is unimpaired/impaired, presumed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is less than N/A and the estimated recovery is 0%.
  • Class 8 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $0 and the estimated recovery is 0%.Class 9 (“Arena Energy, LP Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.
  • Class 10 (“Arena Energy GP, LLC Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.
  • Class 11 (“Arena Energy 2020 GP, LLC Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.
  • Class 12 (“Sagamore Hill Holdings, LP Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.Key Documents:

Events Leading to the Chapter 11 Filings

The Disclosure Statement provides: "Over the last eighteen months, the Debtors have attempted to address their high levels of funded indebtedness using nearly every possible strategy. With approximately $1.0 billion in outstanding debt, the Debtors understood that a reformation of their capital structure was necessary for them to continue their otherwise sound business operations as a going concern and withstand the ever-present volatility of the energy markets.

Following Hurricane Barry in the summer of 2019 and the operational disruptions associated with it, in August 2019 the need to address the Debtors’ capital structure became particularly acute. The Debtors faced a potential financial covenant default under the RBL Facility and Term Loan…the Debtors engaged…Alvarez & Marsal (“A&M”) as restructuring advisor to engage with the Debtors’ secured lenders regarding a forbearance and waiver in connection with the potential financial covenant default and to develop and assess possible holistic restructuring and recapitalization options for the Debtors’ capital structure. These discussions continued through the end of 2019 and into the new year.

These discussions became more urgent as the result of the unprecedented conditions that plagued the Debtors’ industry starting in March 2020: the 'price war' between Saudi Arabia and Russia, coupled with dwindling demand for energy resulting from the COVID-19 pandemic."

Prepetition Indebtedness

As of the Solicitation commencement date (ie August 20th), the Debtors had approximately $1.069 billion in total funded debt obligations. The relative priorities of each debt obligation are as follows:

 Debt

Approx. Principal Amount Outstanding

Unpaid Interest

Total Obligations

RBL Facility

$599.64mn

$29.94mn

$629.58mn

Term Loan

$410.01mn

$29.06mn

$439.07mn

Total Funded Debt Obligations

$1,009.65mn

$59.0mn

$1,068.65mn

The Disclosure Statement attached the following Exhibits:

  • Exhibit A: Plan (Files Separately [Docket No. 12])
  • Exhibit B: RSA
  • Exhibit C: Restructuring Stipulation
  • Exhibit D: Corporate Organization Chart

Proposed Key Dates

  • Voting Deadline: August 28, 2020
  • Objection Deadline: September 18, 2020
  • Plan and Disclosure Statement Hearing: September 25, 2020 

About the Debtors

According to the Debtors: " Arena Energy was founded in 1999 on the belief that mature producing areas of the Gulf of Mexico Shelf still held vast potential—and that with the right technology, talented oil and gas finders could unlock these drilling opportunities. Today, that vision has been realized many times over.

Headquartered in The Woodlands, Texas, Arena Energy focuses on pursuing the lower-risk prospect opportunities that remain in the Gulf after 50 years of drilling by larger oil companies. Most of our projects are exploitation drilling prospects identified through detailed and technical field study. As a result, our oil and gas reserve base has been created primarily through drilling wells rather than acquiring existing production. This approach sets us apart from nearly every other company operating in the Gulf today.

Corporate Structure Chart

 

Read more Bankruptcy News

The post Arena Energy, LP – Gulf of Mexico Drillers File Prepackaged Chapter 11 with Almost $1.1bn of Funded Debt; Severely Impaired Senior Lenders Back Private Sale to Entity Formed by Debtors’ CEO and Lime Rock Partners appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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