March 14, 2021 – HighPoint Resources Corporation and two affiliated Debtors (NYSE: HPR; “HighPoint” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10565 (Judge Sontchi). The Debtors, a Denver, Colorado based company focused on the development of oil and natural gas assets located in the Denver-Julesburg Basin of Colorado, are represented by Domenic E. Pacitti of Klehr Harrison Harvey Branzburg LLP. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Tudor, Pickering, Holt & Co/Perella Weinberg Partners as financial advisors and investment bankers, (iii) AlixPartners, LLP as restructuring advisor and (iv) Epiq Corporate Restructuring as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors, estimated assets of $826.6mn and estimated liabilities $760.4mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Deutsche Bank Trust Co Americas (as trustee for $360.1mn of 7% senior notes due 2022 or "the 2022 Notes"), (ii) Deutsche Bank Trust Co Americas (as trustee for $280.9mn of 8.75% senior notes due 2025 or "the 2025 Notes") and (iii) Meadowlark Midstream Company LLC ($2.0mn trade claim).
The Debtors are currently 46.45% owned by GFW Energy XI LP, an affiliate of energy-focused private equity house NGP. Significant shareholders of publicly traded Bonanza Creek (NYSE: BCEI, which has its own operation centered around the overlapping Niobrara Oil Shale play and with whom the Debtors will be merged upon emergence from bankrupcty) include BlackRock, Inc. (14.4%), FMR LLC (12.1%), Mangrove Partners (10.0%), Dimensional Fund Advisors LP (8.1% and the Vanguard Group (6.1%) (the 2020 Bonanza Creek Proxy Statement is here).
On March 12th, the Debtors and Bonanza Creek announced in a Prospectus supplement that they had not been able to meet the 97.5% "Minimum Participation Condition" required to complete the proposed restructuring and merger as part of an out-of-court exchange offer. They were close to this ambitious mark, but holders of the 2022 notes came up short (89.19%); requiring the Debtors to pivot to Chapter 11 and its more generous thresholds (a majority of holders and at least two-thirds of the aggregate principal of the aggregated 2022 and 2025 Senior Notes), which they comfortably have.
In a press release announcing the filing, the Debtors advised that they had filed for Chapter 11 “to effectuate the previously announced prepackaged plan of reorganization (the 'Prepackaged Plan') and consummate the transactions pursuant to the Agreement and Plan of Merger, dated as of November 9, 2020, by and among Bonanza Creek Energy, Inc. ('Bonanza Creek'), HighPoint and Boron Merger Sub, Inc. (the 'Merger Agreement'). The Prepackaged Plan implements the merger and restructuring transactions contemplated under the Merger Agreement and TSA (as defined below).
As previously announced, the conditions to Bonanza Creek’s exchange offer for HighPoint Operating Corporation’s 7.0% Senior Notes due October 15, 2022 (the '2022 Notes') and 8.75% Senior Notes due June 15, 2025 (the '2025 Notes' and, together with the 2022 Notes, the 'HighPoint Senior Notes') were not satisfied at the expiration time of the exchange offer. However, in response to HighPoint’s solicitation of votes from holders of the HighPoint Senior Notes to accept or reject the Prepackaged Plan, over 99% in aggregate principal amount of the HighPoint Senior Notes and over 90% of the holders of the HighPoint Senior Notes that voted on the Prepackaged Plan voted to accept the Prepackaged Plan. In response to HighPoint’s solicitation of votes from its stockholders to accept or reject the Prepackaged Plan, over 99% of the HighPoint stock that was voted on the Prepackaged Plan voted to accept the Prepackaged Plan. In addition, at a special meeting of Bonanza Creek’s stockholders, over 99% of the Bonanza Creek stock that was voted on the issuance of Bonanza Creek common stock in connection with the merger voted in favor of the issuance. The consummation of the Prepackaged Plan will be subject to confirmation by the Court in addition to other conditions set forth in the Prepackaged Plan, the Merger Agreement, the Transaction Support Agreement, dated as of November 9, 2020, by and among HighPoint, HighPoint Operating Corporation, Fifth Pocket Production, LLC, certain consenting holders of the 2022 Notes and 2025 Notes, and certain consenting HighPoint stockholders (the “TSA”), and related transaction documents.”
On March 12th, Bonanza Creek filed a press release announcing that its proposed merger with the Debtors had been approved by its own shareholders, the contents of that release are substantially identical to the Debtors' own.
As to the length of the Debtors' stay in Chapter 11, court filings indicate that the Debtors intend to request a combined hearing on confirmation of the Plan and the adequacy of the Disclosure Statement "on or about March 17, 2021." The Debtors have already filed their proposed Plan confirmation order and memorandum of law in support of Plan confirmation [Docket Nos. 26 and 23, respectively].
The TSA provides longstop dates of 45 days and 60 days after the Petition date for Plan confirmation and effectiveness, respectively.
Prepackaged Plan and TSA
The Disclosure Statement provides: “The Plan implements a comprehensive restructuring and certain recapitalization transactions, whereby, among other things, Boron Merger Sub Inc. (‘Merger Sub’), a wholly owned affiliate of Bonanza Creek Energy, Inc. (‘BCEI’), will merge with and into HighPoint Resources Corporation as contemplated under that certain Agreement and Plan of Merger, dated as of November 9, 2020 (such transaction, the ‘Merger’, and such agreement, the ‘Merger Agreement’), a copy of which is attached hereto as Exhibit B, and the Debtors will equitize more than $625 million of funded debt and undertake such other transactions contemplated under the Merger Agreement and that certain Transaction Support Agreement, dated as of November 9, 2020 (the ‘TSA’), a copy of which is attached hereto as Exhibit C. After giving effect to the Merger and such restructuring transactions,
Holders of Allowed Notes Claims will own approximately 30.4 percent in the aggregate, and Holders of Allowed Existing HPR Interests will own approximately 1.6 percent in the aggregate, of BCEI on a fully-diluted basis, in each case based on the number of shares of BCEI Common Stock outstanding as of November 9, 2020. Holders of Allowed Notes Claims will also receive their Pro Rata share of $100 million of New Take Back Notes. Substantially all other creditors will be unimpaired.
Holders of approximately 86% of Notes Claims (the ‘Consenting Noteholders’), and Holders of approximately 46.5% of Existing HPR Interests (the ‘Consenting Shareholders’) are party to the TSA and support the Merger and the Plan. Holders of RBL Claims and general unsecured creditors are unimpaired. As set forth herein, the Restructuring Transactions may be implemented on either an out-of-court or in-court basis, depending on the level and timing of consents achieved in connection with the out-of-court process and the other conditions set forth in the Merger Agreement and the TSA. This Disclosure Statement relates to the in-court process. The proposed implementation process facilitates an efficient road to confirmation of the Plan, the subsequent consummation of the Merger, and the restructuring transactions contemplated by the Plan, the TSA, and the Merger Agreement, supported by appropriate due process, and timely emergence from chapter 11.”
The Disclosure Statement, which was drafted and distributed to stakeholders while an out-of-court restructuring was still being considered, continues: "The Plan implements the Merger and the restructuring transactions contemplated under the Merger Agreement and the TSA. The Plan includes the following key features:
- Cancellation of Notes Claims and Existing HPR Interests in Exchange for BCEI Common Stock. Holders of Allowed Notes Claims and Existing HPR Interests will receive their Pro Rata share of 9,804,435 shares of BCEI Common Stock, in accordance with and subject to dilution as permitted by the terms set forth in the Merger Agreement and the Plan. Based on the number of shares of BCEI Common Stock outstanding as of November 9, 2020, Holders of Allowed Notes Claims will receive approximately 30.4 percent of BCEI Common Stock in the aggregate, Holders of Allowed Existing HPR Interests will receive approximately 1.6 percent of BCEI Common Stock in the aggregate, and existing stockholders of BCEI would own approximately 68 percent of BCEI Common Stock.
- New Take Back Notes. In addition to BCEI Common Stock, Holders of Allowed Notes Claims will receive their Pro Rata share of $100 million in aggregate principal amountof the New Take Back Notes.
- Exit RBL Facility.The capital structure of BCEI following the consummation of the transactions contemplated by the Plan shall include a senior secured credit facility with aggregate available commitments (drawn and undrawn, collectively) of not less than $250 million in principal amount (the 'Exit RBL Facility'). Allowed RBL Claims are Unimpaired under the Plan.
- Operational Claims Unimpaired. Holders of Allowed Administrative Claims, Allowed Priority Tax Claims, Allowed Other Secured Claims, Allowed Other Priority Claims, and Allowed General Unsecured Claims are Unimpaired under the Plan. Given the significant support for the Merger and the Debtors’ restructuring transactions, the Debtors elected to pursue an expedited dual-track prepackaged restructuring to maximize value by minimizing both the costs of restructuring and the impact on the Debtors’ businesses.
If [as turned out to be the case] the Debtors are unable to obtain the necessary consents or satisfy the other conditions to consummate the transactions on an out-of-court basis and the other requisite conditions to filing the Plan as set forth in the Merger Agreement and the TSA have been satisfied, the Debtors anticipate commencing the Chapter 11 Cases on or about March 16, 2021, and requesting confirmation of the Plan as soon as reasonably practicable thereafter.
The TSA contains certain milestones, including securing confirmation of the Plan within 45 days after the Petition Date, and the occurrence of the Effective Date within 60 days after the Petition Date, and additional milestones as set forth herein. The timeline from the distribution of this Disclosure Statement to the anticipated confirmation hearing provides all parties in interest a full and fair opportunity to participate in the process."
The exchange offer prospectus circulated by the Debtors and Bonanza Creek adds: "Following the closing of the transactions, based on the number of shares of Bonanza Creek common stock outstanding as of the date of the merger agreement, Bonanza Creek’s existing stockholders wouldown approximately 68% of the issued and outstanding shares of Bonanza Creek and HighPoint’s existing stockholders and the holders of HighPoint Senior Notes would own approximately 32% of the issued and outstanding shares of Bonanza Creek. Based on the number of shares of Bonanza Creek common stock outstanding as of the date of the merger agreement, existing HighPoint stockholders would own approximately 1.6% of Bonanza Creek while participating holders of HighPoint Senior Notes would own approximately 30.4% of Bonanza Creek and up to $100 million of Bonanza Creek Senior Notes."
Events Leading to the Chapter 11 Filing
A familiar story featuring a sustained period of commodity price pressures as compounded by the Saudi/Russia spat, COVID-19 and the storage shortage that resulted "the drastic decrease in demand and corresponding over-supply of oil, natural gas and NGLs." The result being that "[i]n the first ten months of 2020, 43 E&P companies have filed for chapter 11, with these Debtors following suit after a pair of borrowing base redeterminations reduced borrowing headroom from $500.0mn to $200.0mn.
The Disclosure Statement provides: “The difficulties initially faced in 2020 by the Debtors are consistent with those faced industry-wide. Volatile market conditions have challenged oil and gas companies and others for years. From January 1, 17 2014 until April 20, 2020, WTI crude oil prices ranged from a high of $107.26 per barrel to a low of -$37.63 per barrel; during that same period Henry Hub natural gas prices ranged from a high of $6.15 per mmbtu to a low of $1.55 per mmbtu. In early 2020, the initial spread of COVID-19 caused decreased factory output and transportation demand, resulting in a decline in energy prices. To address this, OPEC, led by the Kingdom of Saudi Arabia, called for additional cuts in oil production, subject to agreement by Russia. However, those initial efforts faltered, and the parties failed to reach an agreement as to production levels. Instead, both the Kingdom of Saudi Arabia and Russia announced that they would increase, rather than decrease, production, resulting in surplus supply amidst already decreasing demand for energy.
Meanwhile, the COVID-19 pandemic continued and continues to spread, causing governments across the world to institute strict public health and safety measures, including stay-at-home orders that have further decreased energy demand. On April 12, 2020, in an effort to relieve some of the negative impacts on the industry, 23 countries agreed to commit to withholding 9.7 million barrels of oil per day from the global markets. However, that agreement was not enough to counteract the combined effects of the initial price war and the decreased demand due to COVID-19. The corresponding effects on energy markets have been severe. In March 2020, oil prices plummeted to near $20 per barrel, which was the lowest in nearly twenty years until April 20, 2020, when the WTI crude oil price for May contracts settled at a negative price for the first time in history.
The effect of recent events on companies in the oil and gas industry (not just E&P companies) has been undeniable. However, independent oil and gas companies such as HPR have been especially hard hit, as their revenues are primarily generated from the sale of oil, natural gas, and NGLs. Making matters worse, the drastic decrease in demand and corresponding over-supply of oil, natural gas and NGLs led to an unprecedented storage shortage. Oil and gas companies were left with no option but to consider wellshut-ins and other production measures to address the impending storage issue.
The current volatility in commodity markets has made it especially difficult for some companies to execute on out-of-court restructuring alternatives. In the first ten months of 2020, 43 E&P companies have filed for chapter 11.
…On May 21, 2020, the Company received the results of the first semiannual redetermination, resulting in the reduction of the borrowing base commitment from approximately $500 million to approximately $300 million. On November 2, 2020, following the second semiannual redetermination, the borrowing base was further reduced to $200 million, with elected commitments reduced to $185 million. Combined with the other financial and operational challenges described herein, these borrowing base redeterminations further strained the Debtors’ liquidity and challenged the sustainability of the Debtors’ capital structure.”
As of September 30, 2020, the Debtors had approximately $765.0mn in aggregate outstanding principal of funded debt obligations, the details of which are set forth in more detail in the table below:
The following documents were attached to the Disclosure Statement:
- Exhibit A: Plan of Reorganization
- Exhibit B: Merger Agreement
- Exhibit C: TSA
- Exhibit D: Financial Projections
- Exhibit E: Valuation Analysis
- Exhibit F: Liquidation Analysis
- Exhibit G: Joint Proxy Statement/Prospectus Relating to the Merger
- Exhibit H: Prospectus Relating to the Exchange Offer
- GFW Energy XI LP: 46.45% (an affiliate of energy-focused private equity house NGP)
Liquidation Analysis (see Exhibit E of Disclosure Statement for notes)
About the Debtors
According to the Debtors: "Headquartered in Denver, Colorado, the Debtors are an oil and gas company engaged in the exploration, development and production of oil, natural gas, and natural gas liquids ('NGLs'). The Debtors’ primary production and development activities are located in the Denver-Julesburg ('DJ') Basin in Colorado’s eastern plains. As of December 31, 2019, the Debtors held (i) interests in approximately 568 gross wells, a substantial majority of which are Debtor-operated, (ii) approximately 142,600 net acres of developed and undeveloped leasehold, and (iii) estimated proved developed reserves of approximately 51 million barrels of oil equivalent, in the aggregate, of oil, natural gas and natural gas liquids based on Securities and Exchange Commission parameters"
About Bonanza Creek
According to Bonanza Creek: "Bonanza Creek Energy, Inc. is an independent oil and natural gas company engaged in the acquisition, exploration, development, and production of oil and associated liquids-rich natural gas in the Rocky Mountain region of the United States. The Company’s assets and operations are concentrated in rural, unincorporated Weld County, Colorado, within the Wattenberg Field, focused on the Niobrara and Codell formations. The Company’s common shares are listed for trading on the NYSE under the symbol: “BCEI.”
HighPoint Structure (see Docket No. 6)
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