Denbury Resources Inc. – Court Confirms Prepackaged Plan that Will Eliminate $2.1bn in Debt-for-Equity Restructuring; Debtors Expect to Emerge in Mid-September

September 2, 2020 – The Court hearing the Denbury Resources cases confirmed the Debtors’ Plan of Reorganization [Docket No. 273]. Also on September 2nd, the Debtors filed a technically modified Plan which attached a redline showing changes to the version filed the day previously [Docket No. 268].

On July 30, 2020, Denbury Resources Inc. and 17 affiliated Debtors (NYSE: DNR; “Denbury” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-33801 (Judge Jones). At filing, the Debtors, an independent oil and natural gas company with operations in the Gulf Coast and Rocky Mountain regions, noted estimated assets of $4.6bn and estimated liabilities of $3.1bn.

The Debtors' Plan generated a number of objections from holders of subordinated notes and equity who had argued that Debtors' valuation analysis, financial projections etc. were flawed and that the debtors' Plan had unfairly left them out of the money in respect of Debtors that were not insolvent and a bankruptcy process that should even have been commenced. 

The Debtors, who had support in each of the four voting classes, including those in which the objectors' claims were placed, pushed back that "the Debtors' shareholders are deeply out of the money….allowing liquidity to deteriorate while waiting for the market to rebound sufficiently for value to reach the Subordinated Notes and equity—is risky and value-destructive. The Debtors fought hard to include the Warrants packages for these Classes in the Plan, despite such Classes being $1 billion or more out of the money, and believe they have already achieved the best possible result for the holders of Subordinated Notes and Existing Equity Interests."

Judge Jones has clearly agreed with the Debtors' statement that: "The Debtors recognize that many holders will lose significant investments and are sympathetic. However, this is the economic reality of their position in the Debtors’ capital structure, as recognized by the significant majorities of holders in these Classes who voted to accept the Plan."

In a press release heralding the Plan's confirmation, the Debtors announced that the Court "has confirmed its 'pre-packaged' plan to restructure the Company’s balance sheet and eliminate Denbury’s $2.1 billion of bond debt (the 'Plan'). The Plan received the overwhelming support of the Company’s stakeholders, receiving high consensus across all voting classes and unanimous acceptance from second lien and convertible noteholders. The Company expects to successfully complete its financial restructuring and emerge from Chapter 11 in mid-September.

Consistent with the previously announced Restructuring Support Agreement, the Plan implements a financial restructuring of the Company’s balance sheet.  The Plan is specifically designed to have no impact on the Company’s operations while fully satisfying all trade, customer, employee, royalty, working, and other mineral interest claims in the ordinary course.  Per the Plan, the Company is authorized to and must pay trade, employee, and ordinary course claims."

Restructuring Support Agreement and Plan Overview

On July 29th, the Debtors executed the RSA (attached to Docket No. 3 as Exhibit A) with holders of 100% of loans outstanding under their secured revolver, approximately 67% of their second lien notes, and approximately 73% of their convertible notes. The RSA contemplates confirmation of the Plan to occur on or before September 6, 2020.

The Restructuring Support Agreement contemplates a swift “prepackaged” chapter 11 case, pursuant to which the Debtors will: 

• equitize all $2.1 billion of their bond debt, deleveraging their balance sheet by approximately 90%; 
• leave trade creditors unimpaired and, in concert with the Debtors’ requests for various “first-day” relief (which also are supported by the creditors party to the Restructuring Support Agreement), preserve operational continuity during these chapter 11 cases; 
• provide an opportunity to receive a recovery to out-of-the-money junior stakeholders by making warrants available to holders of (a) subordinated notes, if such class votes to accept the proposed plan, and (b) existing equity, if both the subordinated notes and equity classes vote to accept the proposed plan; and 
• refinance and extend the maturity of their RBL Facility (defined below) which will “roll” into a functioning debtor-in-possession ("DIP") revolver and, upon emergence, into a new, fully committed reserve-based revolving exit facility with initial availability of up to $615.0mn.

By rolling the RBL Facility into DIP financing, the Debtors "will not only be able to reduce immediately the loans outstanding thereunder (and thus reduce their interest expense) after having protectively drawn an extra $200.0mn before the filing, but also to keep their bank syndicate intact for the length of the cases, thus ensuring that the Company has committed financing waiting at emergence."

In a July 29th press release announcing the execution of a restructuring support agreement and its intention to file a prepackaged Plan filing, the Denbury advised that: “it had entered into a Restructuring Support Agreement (the 'RSA') with funded debtholders holding 100% of revolving credit facility loans, approximately 67.2% of second lien notes and approximately 70.8% of convertible notes for a “pre-packaged” plan that will eliminate the Company’s $2.1 billion of bond debt.”

Chris Kendall, Denbury’s President and CEO, commented, “Recently our entire industry has been highly impacted by the global oil demand destruction caused by the COVID-19 pandemic, driving record low oil prices and rapid changes in energy market conditions. In response to this extraordinarily difficult business environment, we have taken multiple proactive steps at Denbury to preserve liquidity, including by reducing our capital spending and general and administrative costs and optimizing operations. This is in addition to many similar actions taken by the Company over the last several years as we navigated significant oil price volatility and made consistent progress in reducing leverage. However, even after taking these steps, it became apparent that a comprehensive financial restructuring would be necessary to address our legacy debt burden and create a clear path forward for the Company."

The following is a summary of classes, claims, voting rights and expected recoveries showing highlighted changes (defined terms are in the Plan and/or Disclosure Statement; see also the Liquidation Analysis below):

• Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 3 (“Pipeline Lease Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 4 (“RBL Claims/Hedge Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated aggregated claims are $1,000,000, plus any accrued and unpaid interest on such principal amount as of the Petition Date.
• Class 5 (“Second Lien Notes Claims”) is impaired and entitled to vote on the Plan. Estimated aggregated claims are $1,629,452,317 (reduced from $1,721,531,002 in the last technically modified Plan), plus any accrued and unpaid interest on such principal amount as of the Petition Date. Each Holder of an Allowed Second Lien Notes Claim shall receive its Pro Rata share of 95% of the New DNR Equity, subject to dilution by the Warrants and the Management Incentive Plan.
• Class 6 (“Convertible Notes Claims”) is impaired and entitled to vote on the Plan. Estimated aggregated claims are $234,099,050, plus any accrued and unpaid interest on such principal amount as of the Petition Date. Each Holder of an allowed Convertible Notes Claim shall receive its Pro Rata share of:(i) 5% of the New DNR Equity, subject to dilution by the Warrants and the Management Incentive Plan; and (ii) the Convertible Notes Warrant Package.
• Class 7 (“Subordinated Notes Claims”) is impaired and entitled to vote on the Plan. Estimated aggregated claims are $251,396,920, plus any accrued and unpaid interest on such principal amount as of the Petition date Treatment: (i) if Class 7 votes to accept the Plan, each Holder of an Allowed Subordinated Notes Claim shall receive its Pro Rata share of the Subordinated Notes Warrant Package and (ii) if Class 7 votes to reject the Plan, Holders of Subordinated Notes Claims will not receive any distribution on account of such Claims, which will be canceled, released, and extinguished as of the Effective Date.
• Class 8 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 9 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
• Class 10 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
• Class 11 (“Existing Equity Interests”) is impaired and entitled to vote on the Plan. Treatment: If (A) Class 7 votes to accept the Plan and (B) Class 11 votes to accept the Plan, each Holder of Existing Equity Interests shall receive its Pro Rata share of the Existing Equity Warrant Package and (ii) if either Class 7 or Class 11 votes to reject the Plan, Holders of Existing Equity Interests will not receive any distribution on account of such Interests, which will be canceled, released, and extinguished as of the Effective Date.

Plan Supplement

On August 21, 2020, the Debtors filed a Plan Supplement [Docket No. 185, subsequently amended at Docket No. 257] which collectively attached the following documents:

• Exhibit A: New Organizational Documents [Docket No. 257]
• Exhibit B: 1129(a)(5) Disclosures Regarding Directors and Officers [Docket No. 185]
• Exhibit C: Assumed Executory Contracts and Unexpired Leases Schedule [Docket No. 257]
• Exhibit D: Rejected Executory Contracts and Unexpired Leases Schedule [Docket No. 185]
• Exhibit E: Schedule of Retained Causes of Action [Docket No. 185]
• Exhibit F: Exit Facility Documents [Docket No. 185]
• Exhibit G: Management Compensation Term Sheet [Docket No. 185]
• Exhibit H: New Warrants Agreement and Certificate [Docket No. 185]
• Exhibit I: Registration Rights Agreement [Docket No. 185]

Voting Result

On September 1, 2020, the Debtors' claims agent notified the Court of the Plan voting result [Docket No. 258] which were as follows:

• Class 5 (“Second Lien Notes Claims”) – 481 claim holders, representing $1,415,160,049 in amount and 100% in number, accepted the Plan.
• Class 6 (“Convertible Notes Claims”) – 107 claim holders, representing $218,063,000 in amount and 100% in number, accepted the Plan.
• Class 7 (“Subordinated Notes Claims”) – 412 claim holders, representing $111,722,998 (or 97.74%) in amount and 87.66% in number, accepted the Plan. 58 claim holders, representing $2,583,000 (or 12.34%) in amount and 2.26% in number, rejected the Plan.
• Class 11 (“Existing Equity Interests”) – N/A claim holders, representing 75,740,166 (or 83.10%) in amount, accepted the Plan. N/A claim holders, representing 15,401,641 (or 16.90%) in amount, rejected the Plan.

Events Leading to the Chapter 11 Filing

The Disclosure Statement provides: "The market difficulties faced by the Debtors are consistent with those faced industry-wide. Oil and natural gas companies and others have been challenged by volatile commodity prices for years. During the past nine years, the NYMEX WTI oil price has ranged from a high of $113.39 per Bbl in April 2011 to a low of negative $37.63 per Bbl on April 20, 2020, and traded at $41.14 as of July 24, 2020. These markets will likely continue to be volatile in the future, especially given the current geopolitical conditions. Additionally, 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 remain at the current depressed levels over the next several years.

These market conditions have affected oil and gas companies at every level of the industry around the world. Independent oil and gas companies have been especially hard-hit, however, as their revenues are generated from the sale of unrefined oil and gas. Since the beginning of 2020, over 23 oil and gas companies have filed for chapter 11 protection. Numerous other oil and gas companies have defaulted on their debt obligations, negotiated amendments or covenant relief with their creditors to avoid defaulting, or have effectuated out-of-court restructurings."

DIP-to-Exit Financing

The Debtors have arranged DIP financing of up to $615.0mn to be provided by certain of the Debtors' prepetition RBL lenders and agented by JPMorgan Chase Bank (also the prepetition RBL credit facility agent) which will be comprised of new money term loans and a roll-up of the entirety of the Debtors' prepetition credit agreement ($230.0mn at Petition date). As to the new money, the Debtors will have access to $25.0mn upon issuance of an interim DIP order. Upon emergence, the DIP financing will “roll” into an exit facility. The DIP term sheet is attached to Docket No. 3 as Exhibit B.

Prepetition Indebtedness

As of the Petition date, the Debtors had approximately $2.4bn in total outstanding principal amount of funded debt obligations, with that debt as follows:

Significant Prepetition Shareholders

• BlackRock, Inc: 9.70%
• The Vanguard Group: 7.40%
• State Street Corp.: 7.22%

The following documents were attached to the Disclosure Statement:

• Exhibit A: Plan of Reorganization
• Exhibit B: Restructuring Support Agreement (and annexes thereto, including the DIP-to-Exit Facility Term Sheet, Warrants Term Sheet, and Governance Term Sheet)
• Exhibit C: Corporate Organization Chart
• Exhibit D: Liquidation Analysis
• Exhibit E: Financial Projections
• Exhibit F: Valuation Analysis

Liquidation Analysis (see Exhibit D to Disclosure Statement for notes)

About the Debtors

According to the Debtors: "Denbury is an independent oil and natural gas company with operations focused in two key operating areas: the Gulf Coast and Rocky Mountain regions.  The Company’s goal is to increase the value of its properties through a combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to carbon dioxide enhanced oil recovery (CO2 EOR) operations."

As of June 30, 2020, the Debtors (i) held interests in approximately 2,946 gross (2,197 net) producing wells, of which all but 636 gross and 150 net wells are Debtor-operated, and (ii) had approximately 951,711 gross (510,602 net) total acres under lease. As of December 31, 2019, the Debtors had estimated proved developed reserves of approximately 206.9 MMBOE of oil and condensate, natural gas, and NGLs, with such estimates based on Securities and Exchange Commission parameters. In 2019, the Debtors’ activities yielded total production of 21,248 MBOE and had an adjusted EBITDAX of $607.0mn.

Corporate Structure Chart

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