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September 12, 2019 − Alta Mesa Resources, Inc. and six affiliated Debtors (NASDAQ: AMR, “Alta Mesa” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-35133. The Debtors, an independent exploration and production company focused on the development and acquisition of unconventional oil and natural gas reserves in the eastern portion of the Anadarko Basin, are represented by John F. Higgins of Porter Hedges LLP. Further board-authorized engagements include (i) Latham & Watkins as bankruptcy counsel, (ii) Perella Weinberg Partners LP as investment banker and financial advisor and (iii) Prime Clerk as claims agent.
The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. The Debtors further refer to assets and liabilities as at December 31, 2018, which were $1.4bn and $864.0mn, respectively. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) U.S. Bank National Association (as trustee in respect of a $509.3mn unsecured note), (ii) TGS USA Corporation ($1.6mn trade debt) and (iii) QES Pressure Plumbing ($1.3mn trade debt).
In a press release announcing the Chapter 11 filing, the Debtors stated: "Despite considerable progress in reducing costs and improving well results, the Companies continue to operate against a historically challenging commodity price environment and a capital market that is highly constrained for energy companies. Ultimately, these factors made bankruptcy protection the best option for the Companies as they continue production operations while negotiating with their lenders….The Companies’ midstream platform, Kingfisher Midstream, LLC and its subsidiaries are not debtors and are not part of the Chapter 11 reorganization process." In fact, Kingfisher Midstream has been named in an adversary proceeding filed by the Debtors who want to be able to reject existing intra-group agreements in Chapter 11.
Jim Hackett, the Debtors' Executive Chairman added: “We believe that the Chapter 11 process provides the best pathway for Alta Mesa Resources and Alta Mesa Holdings to restructure their respective balance sheets and to regain the financial flexibility necessary to develop their large position in the STACK in a manner that will maximize value for all their stakeholders.”
The Debtors also filed an 8-K, which states: “The Debtors will immediately begin a marketing process to sell their assets and the assets of certain of their non-Debtor affiliates. Certain of the Debtors have also filed a complaint seeking a Bankruptcy Court determination that the crude oil, gas, and water gathering agreements between Debtor Oklahoma Energy Acquisitions LP, and non-Debtors Kingfisher Midstream, LLC and Oklahoma Produced Water Solutions, LLC can be rejected by the Debtors."
The petition lists each of the below as holding at least 10% of Alta Mesa's common stock:
- Riverstone Funds
- High Mesa Holdings LLP
- HPS Investment Partners, LLC
- Bayou City Energy Management LLC
Additionally, Orbis Investment Management Limited is listed as having greater than 5%.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Regan Declaration”), John C. Regan, the Debtors' Chief Financial Officer, detailed the events leading to Debtors’ Chapter 11 filing. The Regan Declaration recounts a now familiar story of lower commodity prices leading to constrained capital expenditure followed by spooked lenders who further reduce availability under existing credit arrangements. The Regan Declaration adds "poorer than expected well performance" to the list for good measure and terminates the "Tale of Woe" section of the Declaration with the observation that the Debtors have a $32.5mn payment to their RBL lenders on September 12, 2019, ie one day after their Chapter 11 filing.
The Regan Declaration states: "The Debtors’ business faces a number of challenges. Principal among these challenges is volatility and sustained decreases in oil and natural gas prices. Oil, natural gas, liquids, and natural gas prices are the key driver of the Company’s financial results. As an independent exploration and production company, the AMH Debtors are particularly vulnerable to oil, natural gas liquids, and natural gas prices because their revenues are primarily generated from the sale of these commodities.
Likewise, non-Debtor KFM’s revenue is tied to production levels and demand for hydrocarbons. The decline in commodity gas prices since late 2018 has had a severe and adverse effect on the Debtors’ financial performance.
In addition, the Debtors’ business requires significant capital expenditures to maintain exploration, drilling, and production activities. Liquidity constraints brought on by operational challenges associated with aggressive growth in 2018 (when the Debtors operated up to nine rigs) and the decline in commodity prices have negatively affected the Debtors’ ability to maintain drilling activities. Poorer than expected well performance, together with an inability to sustain adequate drilling levels, has inhibited the Debtors’ capacity to generate revenue.
Amidst these operational and market challenges, the Company’s liquidity has been further strained by two borrowing base reductions under the AMH RBL in 2019. In April 2019, a scheduled borrowing base redetermination reduced the availability under the AMH RBL from $400 million to $370 million. In addition, the lenders under the AMH RBL made an optional borrowing base redetermination in August 2019, which further reduced the borrowing base to $200 million and resulted in an approximate $162 million deficiency. The AMH Debtors are obligated to pay down the deficiency over five consecutive monthly installments. The first deficiency payment of $32.5 million is due September 12, 2019.
Under the AMH RBL, certain financial covenants are tested on September 30, 2019. Absent a successful deleveraging transaction, an infusion of capital, and/or covenant relief, the AMH Debtors would not be in compliance with financial covenants, which would result in an event of default under the AMH RBL."
About the Debtors
The Debtors describe themselves as a "pure play STACK operator" and provide the following overview of their company: "Alta Mesa Resources, Inc. is a publicly traded (NASDAQ: AMR, AMRWW) independent exploration and production company focused on the development and acquisition of unconventional oil and natural gas reserves in the eastern portion of the Anadarko Basin referred to as the STACK. The STACK is an acronym describing both its location—Sooner Trend Anadarko Basin Canadian and Kingfisher County—and the multiple, stacked productive formations present in the area. The STACK is a prolific hydrocarbon system with high oil and liquids-rich natural gas content, multiple horizontal target horizons, extensive production history and historically high drilling success rates. Alta Mesa has assembled a large, highly contiguous leasehold position, largely in the up-dip, naturally-fractured oil portion of the STACK in eastern Kingfisher County, Oklahoma.
The Company has identified over 4,000 gross horizontal drilling locations, at least half of which it expects to operate. These drilling locations are in Alta Mesa’s primary target formations comprised of the Osage, Meramec and Oswego. Alta Mesa opportunistically acquires acreage in its non-operated locations with the goal of operating wells in these locations. Alta Mesa has a seasoned management team, whose mission is to maximize the profitability of our assets in a safe and environmentally sound manner. We apply advanced engineering analyses and enhanced geological techniques to under-developed or over-looked conventional resource areas to create value. We employ disciplined management processes and have the flexibility to respond to the market."
The Regan Declaration adds: "The Company has two primary business segments: an upstream oil and gas exploration and production business operated by Debtor Alta Mesa Holdings, LP ('AMH') and its subsidiaries (such subsidiaries, together with Debtor AMH and Alta Mesa Holdings GP, LLC, the 'AMH Debtors'), and a midstream oil and gas services business operated by non-Debtor Kingfisher Midstream, LLC."
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