Hilltop Energy, LLC – Texas-Based Driller Files Prepackaged Chapter 11 for the Second Time in Three Years, This Time Debtors Set to Emerge in Hands of Noteholder J.P. Morgan Securities, LLC

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May 16, 2019 − Hilltop Energy LLC and one affiliated Debtor (“Hilltop Energy” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11122. The Debtors, independent energy companies engaged in the development and production of, and exploration for, crude oil and natural gas, are represented by Norman L. Pernick of Cole Schotz P.C. Further board-authorized engagements include Dundon Advisers as financial advisor. 

The Debtors’ petitions note between 1 and 50 creditors; estimated assets between $10mn and $50mn; and estimated liabilities between $10mn and $50mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Chase Lincoln First Commercial (partially secured debt, value not disclosed), IHS Global ($26k trade claim) and (iii) Netherland, Sewell & Associates ($20k professional services claim). 

The Cubic Energy, Inc. Chapter 11

Hilltop Energy’s predecessor, Cubic Energy, Inc. ("Cubic") was vulnerable to the volatility of the oil and gas industry. In late 2015, after exhausting other restructuring alternatives, Cubic and certain of its affiliates (collectively, the "Cubic Debtors") pursued a prepackaged plan of reorganization before this Court through the jointly administered chapter 11 cases In re Cubic Energy, Inc., et al., Case No. 15-12500 (CSS) (collectively, the "Cubic Chapter 11 Cases"). The Cubic Plan went effective on March 1, 2016. The Cubic Plan provided, among other things, that holders of prepetition secured notes received, on account of their claims, their pro rata share of (i) membership interests in reorganized Cubic Energy, and (ii) 14.00% First Priority Senior Secured Notes due 2021 issued by reorganized Cubic Energy in the principal amount of $30,000,000. All general unsecured claims were discharged and eliminated and all equity interests in the Cubic Debtors were extinguished without payment.

Hilltop Energy Plan and Restructuring Support Agreement (the "RSA")

The Disclosure statement provides the following overview: "Pursuant to the Plan, the Debtors seek to recapitalize their businesses primarily by converting the Senior Secured Notes to equity. The recapitalization contemplated by the Plan will also result in the cancellation of existing Energy Debtor Membership Interests and Asset Debtor Membership Interests. Solicitation on the Plan will commence on May 16, 2019, and conclude on May 16, 2019.The Debtors negotiated the Plan with the Supporting Senior Secured Noteholder [ie J.P. Morgan Securities, LLC ], Chase Lincoln First Commercial Corporation (the ‘Lender’) and Rivershore Resources LLC (‘Rivershore’), the non-debtor parties to the Restructuring Support Agreement. The Supporting Senior Secured Noteholder represents that it holds 100% of the aggregate principal amount of Senior Secured Notes Claims (Class 3), and the Lender represents that it holds 100% of the Professional Fee Note Claims (Class 4).The creditor parties to the Restructuring Support Agreement entitled to vote have agreed to vote in favor of the Plan, subject to the terms and conditions of the Restructuring Support Agreement. The Restructuring Support Agreement sets forth certain material terms of the financial restructuring agreed to among the Debtors, the Supporting Senior Secured Noteholder, the Lender and Rivershore, including proposed distributions to be received by creditors pursuant to the Plan, the funding of the restructuring pursuant to the Plan, the Debtors’ proposed post-reorganization capital structure and select entity governance provisions, and other key terms of the Plan."

The Pupkin Declaration (defined below) adds the following: "The RSA and consensual Plan contemplate prompt emergence from chapter 11 with the following key terms: 

  • all Senior Secured Notes will be cancelled, and the Holder of all Allowed Senior Secured Notes Claims, or its assignee or designee, will receive (100% of the Reorganized Energy Debtor Membership Interests and (2) $1,470,000 in Cash from the Exit Facility proceeds. This will eliminate the Debtors’ secured note debt, removing approximately $53 million in secured obligations from the Debtors’ consolidated balance sheet. 
  • in consideration for certain commitments and obligations by Rivershore, including amendment of the RMA and certain financial accommodations, 55% of the equity of Reorganized Asset ("Newco") will be issued to Rivershore, and the remaining 45% of Newco will be issued to Reorganized Energy; 
  • existing equity interests in Hilltop Energy and Hilltop Asset will be canceled and discharged; 
  • CLFCC will provide an Exit Facility for the Company’s use on emergence from the prepackaged chapter 11 bankruptcy; and 
  • all other Allowed Claims will be satisfied in full, including payment of Allowed General Unsecured Claims in the ordinary course of the Debtors’ business."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Pupkin Declaration”), Claude Pupkin the Debtors’ Manager detailed the events leading to Hilltop Energy’s Chapter 11 filing. The Pupkin Declaration states, “The Company has been cash flow negative every year since its formation following the chapter 11 cases of Cubic and its affiliates, as the revenue generated by producing wells is not sufficient to cover operating expenses and ‘workover’ expenses, which is maintenance capex to keep the wells flowing. The Debtors’ gross production has declined from approximately 10.5 million cubic feet per day (‘mmcfd’), in March 2016 to roughly 5.0 mmcfd as of the date hereof. Although the Debtors have been able to service their debt obligations (primarily by paying interest in the form of additional notes), over time, the yield of the Debtors' producing oil and gas wells has been and may continue to be in constant decline. Consequently, the Debtors anticipate that they will generate less revenue and cash flow and, ultimately, be unable to satisfy their debt obligations before or at maturity 20.Although production declines are expected in the oil and gas industry, the Debtors have faced several unanticipated challenges since emerging from the Cubic Chapter 11 Cases. Since emergence, over 20% of the Debtors’ producing gas wells have stopped producing due to downhole operational and/or technical issues. During this same time period, the Debtors also invested in production uplift projects—including an estimated $4 million on workover and/or recompletion projects for three wells—but the efforts to increase production from those wells were unsuccessful. The effects of these production problems on the Debtors’ revenue have been compounded by the weak natural gas market over the past few years. 

Absent development of new wells resulting in increased productivity, the Debtors will continue to suffer a decline in revenue and, as a result, operating losses. These financial and operational factors materially impair the Debtors’ ability to service their significant prepetition debts owed to the Prepetition Secured Noteholders and also significantly impairs the value of the Debtors’ productive assets. In addition, note maturities in 2021 have compelled the Debtors to proactively address their over-leveraged capital structure in a manner that does not disrupt their business relationships. 

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

  • Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is 100%.
  • Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is 100%.
  • Class 3 (“Senior Secured Notes Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is 9%.
  • Class 4 (“Professional Fee Note Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is 100%.
  • Class 5 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is 100%.
  • Class 6 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is 100%.
  • Class 7 (“Energy Debtor Membership Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
  • Class 8 (“Asset Debtor Membership Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.

Plan Voting Results [Docket No. 18]

  • Class 3 (“Senior Secured Notes Claims”): 1 claim holder, representing $53,473,187.13 in amount and 100% in number, accepted the Plan.
  • Class 4 (“Professional Fee Note Claims”): 1 claim holder, representing $530,294.44 in amount and 100% in number, accepted the Plan.

The following exhibits were attached to the Disclosure Statement:

  • Exhibit A: Plan
  • Exhibit B: Rivershore Term Sheet

Proposed Key Dates:

  • Voting Deadline: May 16, 2019
  • Plan Supplement Filing Date: June 10, 2019
  • Objection Deadline: June 17, 2019
  • Combined Hearing Date: June 24, 2019

About Hilltop Energy

The Debtors are independent energy companies engaged in the development and production of, and exploration for, crude oil and natural gas. The Debtors’ oil and gas assets are all held by Hilltop Asset and located in Leon and Robertson Counties, Texas.  Historically, the Debtors strived to maintain a balanced portfolio of drilling opportunities that ranged from lower risk, field extension wells, to the smaller scale pursuit of appropriate, higher risk, high reserve potential prospects.  The Debtors also focused on exploration opportunities that could benefit from advanced technologies designed to reduce risks and increase success rates.  Since March 2016, the Debtors have focused on maximizing production and minimizing costs associated with existing wells.  In addition, the Company has identified prospective new drilling opportunities and would like to pursue these efforts but lacks the resources.

The Debtors do not have any employees and do not operate oil and gas properties.  Rather, the properties are operated and managed under the terms of an operating agreement (the "RMA") by and between Rivershore Operating, LLC ("Rivershore" or "Operator") and Hilltop Energy, dated October 1, 2016.2  As Operator, Rivershore manages the day-to-day operations of the Debtors’ oil and gas production at the well sites and initially covers expenses incurred with respect to all field and lease operations on account of its working interest in the well and that of holders of non-operating working interests.  Rivershore then performs an accounting of these costs, and seeks repayment from the holders of non-operating working interests on a pro rata basis.

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