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Rockdale Marcellus, LLC ­– Selects TXCR Acquisition as Stalking Horse Bidder; With Court Subsequently Finding Selection Non-Compliant with Bidding Procedures Order

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December 7, 2021 – Further to the Court’s September 22nd bidding procedures order which required the filing of: (i) a notice designating any stalking horse bidder by 4pm on December 6th (subsequently extended by the Court by one day to December 7th) and (ii) the related asset purchase agreement as of that same date [Docket No. 297], the Debtors have filed a notice selecting TXCR Acquisition Co., LLC ("TXCR") as the stalking horse bidder in a section 363 auction/sale of substantially all of their assets [Docket No. 479]. 

Thats the Debtors' version of events anyway, with the Court disagreeing that the Debtors' December 7th filing actually complied with the milestones in its bidding procedures order; both as to the naming of a stalking horse and the filing of an APA; with the Court noting that the Debtors have conceded that the APA is not fully negotiated and positing that without an APA the existence of a stalking horse is by definition not possible. No APA…no stalking horse…and no Court-compliant notification; with the Debtors' efforts to appear as if they have complied with the bidding procedures order leaving the Court both confused and annoyed (the confusion feigned, the annoyment real). The Court expressing its displeasure in an order rejecting the Debtors' motion to extend by a further day the period during which they can file the TXCR APA [Docket No. 482].

So do the Debtors have a stalking horse or not? Probably not without otherwise amending the overall auction/sale timetable to provide other interested parties (including other parties which had expressed interest in a stalking horse role) with the same opportunities to participate in (and/or object to) the process as provided for in the Debtors' timetable as approved by the Court. The Court stating that the Debtors "fail to show that it [a further extension] would not cause prejudice…[and] that "the Court no justification to truncate the deadlines when the need arises out of a situation of the Debtors’ own creation."

If ultimately approved (the Debtors not only dealing with the Court's insistence on process but alos the fact that they have not been able to complete negotiations with TXCR in the first place), the Debtors/TXCR are asking for bidder protections including a 1.5% break-up fee and a $500k expense reimbursement. The Debtors have not provided any detail as to the identity of TXCR or a purchase price. 

As to overall bidder interest, the Debtors provide: "The Debtors, with the assistance of their investment banker Houlihan Lokey Capital, Inc. ('Houlihan') and other advisors, have conducted a robust marketing process. The Debtors contacted 206 parties regarding the Sale, and, of that number, 51 Potential Bidders executed a Confidentiality Agreement and 18 Potential Bidders obtained data room presentations. Parties wishing to be designated as the Stalking Horse Bidder were asked to submit a Bid by November 30, 2021. The Debtors received a number of Bids from Bidders seeking to serve as the Stalking Horse Bidder. Other Potential Bidders have communicated their intent to submit Bids by the Bid Deadline of December 13, 2021."

A hearing on the matter is now scheduled for December 14th.

Background

Notwithstanding that the Debtors' notice is entitled "Notice of (I) Designation of Stalking Horse Bidder, (II) Filing of Stalking Horse Agreement, and (III) Request for Approval of Proposed Bid Protections," ie that the Debtors were filing a stalking horse agreement with the notice, no such agreement is attached….because it does not yet exist

In its motion to extend the period during which it can file the stalking horse APA, the Debtors note that they need "another day to continue working on such agreement with the Stalking Horse Bidder." In its order rejecting that motion [Docket No. 482], the Court wonders how one can have a stalking horse without having come to terms on an agreement. Fair point. 

The Court's order provides: "After reviewing the documents, the Court finds the Notice deficient for two reasons. First, the title is misleading because it references the “Filing of [a] Stalking Horse Agreement.” By the Debtors’ own admission, no such agreement is attached. Instead, the Debtors filed the Second Motion to Extend seeking an additional 24 hours to produce the Stalking Horse Agreement.The Debtors concede that “the parties remain in negotiations on the form of Stalking Horse Agreement” and candidly reveal that additional time is needed “to continue negotiating the precise terms” of any such agreement. The lack of a definitive agreement reveals the Notice’s second (but fatal) flaw: Without a Stalking Horse Agreement, there is no Stalking Horse Bidder.

Given the improper Notice, the Court finds the Second Motion to Extend is moot. It serves no purpose to extend the deadline to file an agreement when the Debtors have not timely secured a Stalking Horse Bidder in accord with the Bidding Procedures Order.

Even if the Court were to consider a further extension (of either the deadline to designate the Stalking Horse Bidder or the time to file the Stalking Horse Agreement), the Debtors fail to show that it would not cause prejudice. It is difficult to assess the propriety of bid protections without knowing the terms of the Stalking Horse Bid. And absent details of any kind, parties cannot credibly ascertain the benefit brought to the estate by the proposed bidder. In addition, the Bidding Procedures Order contemplated a period of four days to object to a stalking horse designation. Although not specified as 'business days,' the schedule offered by the Debtors provided just that: an objection period of four business days from December 6 through December 10.

When the Court approved the Debtors’ first requested extension (to December 13), the objection period was preserved at four business days. Any extension at this point only reduces the period of time a party would have to review an undoubtedly complex and voluminous document.

Ultimately, the Debtors proposed an aggressive timetable for their sale. Now that impediments have appeared, the Debtors wish to maintain their schedule at the expense of other parties. Under these circumstances, the Court finds no justification to truncate the deadlines when the need arises out of a situation of the Debtors’ own creation."

Proposed Key Dates:

  • Sale Objection Deadline: December 13, 2021
  • Bid Deadline: December 13, 2021
  • Auction: December 16, 2021
  • Sale Hearing: December 22, 2021

Goals of the Chapter 11 Filings

On September 21st, Rockdale Marcellus Holdings and one affiliated Debtor (“Rockdale Marcellus” or the “Debtors,” the owners and operators of producing wells formed with the 2017 acquisition of Shell Marcellus properties) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. At filing, the Debtors cited depressed commodity pricing (ultimately resulting in an October 2020 borrowing base reduction) and a costly gathering agreement with UGI Energy Services (as detailed further below) as necessitating the Chapter 11 filings.

The Didonato Declaration (defined below) provides: "The Debtors filed these cases with a dual-pronged strategy to reorganize their businesses. The first prong is a section 363 sales strategy, which will be conducted by the Debtors’ investment banker—Houlihan Lokey Capital, Inc. ('Houlihan Lokey')—pursuant to market-standard and Court-approved sales procedures. As part of this strategy, the Debtors will seek the rejection of the UGI agreement so that bidders will have the opportunity to bid for assets with or without UGI providing gathering/transportation services, at their option.

The second prong is a plan strategy, which the Debtors will pursue (excising its fiduciary out of the section 363 sales process) if a better, more value-maximizing
event emerges before the sale hearing. Given that plan feasibility will likely necessitate the injection of substantial capital, the Debtors’ proposed rejection of the UGI agreement may help initiate such an event. But, as with the section 363 sales process, ultimate rejection of the UGI agreement will be at the option of whichever plan sponsors may appear. Under either exit strategy, the Debtors plan to emerge from bankruptcy as a  reorganized,  appropriately  capitalized  business  enterprise."  

Events Leading to the Chapter 11 Filings

The Debtors' declaration in support of first day filings [Docket No. 81] provides: "…the Debtors—like many other participants in the oil and gas sector—have struggled during a sustained period of depressed commodity pricing. This led to a borrowing-base redetermination by lenders under the Debtors’ reserve-based loan (the “RBL”) in October 2020. The collateral redetermination not only reduced future borrowing availability, but it also obligated the Debtors to pay down the principal balance of its RBL facility resulting in an immediate liquidity shortfall. Further development activities (e.g., drilling new wells) and capital expenditures were suspended as a result of the lack of liquidity.

…the Debtors’ profitability has been further hampered by a costly agreement governing gathering and transportation of gas from the wellhead to market. UGI Energy Services ('UGI') owns the system/piping that moves the Debtors’ gas to market, and the Debtors’ agreement with UGI compels, among other terms, certain minimum volume commitments ('MVC'), capital recovery charges, as well as compression and  Case gathering fees (with escalation). Certain of the Debtors’ financial commitments to UGI remain fixed by contract, even as commodity prices deteriorated. The agreement also has significant “dedication” commitments, which contributed to the business’ lack of growth and business combinations/sales to other operators in the area. Taken together, the commercial terms of the UGI agreement negatively impact the sustainability of the Debtors’ capital structure and limit their restructuring alternatives.

The Debtors have pursued an out-of-court resolution of the Debtors’ debt burden for nearly a year. Those efforts have included a regular way M&A sales process, attempted renegotiation of the UGI gas gathering and transportation agreement by various parties, and discussions with the Debtors’ secured creditors (who have been in default forbearance for nearly 9 months). Parties have negotiated in good faith and in a commercial manner. But, despite long  and exhaustive efforts, the terms of a consensual out-of-court restructuring have not emerged."

About the Debtors

According to the Debtors: “Rockdale Marcellus, LLC was formed with the acquisition of Shell’s operated Marcellus properties in Tioga, Lycoming and Bradford Counties in Pennsylvania in 2017. Rockdale Marcellus owns and operates producing wells on a contiguous acreage position of ~48k gross acres with ~100% working interest. Current production is ~110 mmcfpd as of March 2021, with over 100 future drilling locations identified in the highly productive Marcellus dry gas shale formation. Our management team brings significant expertise to evaluate and develop shale reservoirs generating both exceptional value and long term growth."

Corporate Structure

The Debtors are organized as limited liability companies under Title 3 of the Texas Business Organizations Code. RMH is owned by a group of individual and institutional investors, including members the Debtors’ senior management team, who own common units indirectly in Rockdale through an aggregator entity known as Rockdale Holdings, LLC. Tsunami Marcellus Partners, LP is the single largest equity holder in RMH, owning more than 85% of the Preferred
A Units in RMH. Rockdale is the wholly-owned subsidiary of RMH. The Debtors’ current organizational structure is as follows:

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