PetroShare Corp. – Cash-Strapped E&P Files Chapter 11 Citing “Collateral Damage” of Colorado’s Controversial Senate Bill 181, Close to Naming Stalking Horse for Asset Sale

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September 4, 2019− PetroShare Corp. and one affiliated Debtor (OTCQB: PRHR, “PetroShare” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Colorado, lead case number 19-17633. The Debtors, a Colorado-based oil and gas exploration and production company with operations in the Wattenberg Field of the Denver-Julesburg Basin, are represented by Trey A. Monsour of Ponsinelli PC. Further board-authorized engagements include (i) MACCO Restructuring Group LLC ("MACCO") as financial advisor, with MACCO's Mr. Drew McManigle serving as Chief Restructuring Officer, and (ii) The BMC Group as claims agent. 

The Debtors’ lead petition notes between 100 and 200 creditors, estimated assets of $32.9mn and estimated liabilities of $45.1mn. Documents filed with the Court [Docket No. 4] list the Debtors’ three largest unsecured creditors as (i) Gardner Lewis Event Driven Fund ($1.2mn unsecured note), (ii) Weatherford Artificial ($688k trade debt) and (iii) William Moreland ($600k Series B Unsecured Noteholder).

In a press release announcing the filing (see also 8-K), the Debtors advised that “PetroShare intends to pursue efforts to recapitalize the company, which may include the sale of some or all of its assets pursuant to the Bankruptcy Code in a court-supervised process designed to achieve the highest and best price for those assets. The Company believes that its cash position is adequate to continue existing operations as a debtor-in-possession and to maintain most staffing and equipment throughout the court-supervised recapitalization and/or sale process." 

Stephen J. Foley, the Debtors' CEO, added: "The new Colorado regulatory environment governing oil and gas permitting in the state and the associated uncertainty on rule-making has made it very difficult to attract new capital investment in this sector. We are filing a voluntary Chapter 11 petition in order to proceed with the orderly recapitalization or sale of some or all of the Company’s assets and to continue to pay active vendors, suppliers and other ongoing business expenses without interruption during the process. Unfortunately, the collateral damage of Senate Bill 181 has manifested itself in the slowdown of the state’s oil and gas sector, resulting in job losses.”

Section 363 Asset Sale and Pre-Petition Marketing Efforts

The Debtors ran an extensive pre-petition marketing process (167 potential investors targeted, 7 NDAs, and 3 bids) that ultimately resulted in a single bidder who required the Debtors to file Chapter 11s as a condition for a sale. That prospective purchaser, as yet un-named, will serve as a stalking horse in a section 363 auction/sale process. Critically for the Debtors, their pre-petition lender

The McManigle Declaration (defined below) states: "The Company’s Board met on March 25, 2019 and made the determination that it was in the best interests of the Company, its creditors, and other parties in interest to authorize the Company to seek relief under chapter 11 of the Bankruptcy Code and seek to sell substantially all of the Debtors’ assets. 

Considering the foregoing, the Company began discussions with interested parties regarding a sale of substantially all the Company’s assets. In that regard, on or about April 17, 2019, the company engaged Seaport Global Securities, LLC as its investment banker ('Seaport' or 'IB') to conduct a broad and extensive marketing effort on the Debtors’ operated interest in Shook pad and a portion of non-operated interests. These efforts resulted in a potential target list of 167 potential investors, which included non-op buyers, DJ Basin and Rockies operators, and energy focused financial firms. The opportunity was also marketed broadly by the IB to a list containing out of basin operators and financial firms. All these efforts resulted in the issuance of 17 confidentiality agreements of which 7 were executed. Subsequently, 3 bids were received, including bids for the entire Company. Due to the complexity of the business, its ill-liquidity and the Foreclosure Action, the Company and its officers and advisors closely examined, analyzed and negotiated with prospective bidders to maximize the potential recovery to creditors. An additional negative factor that increased the complexity of the Company’s efforts and analysis was certain recently enacted Colorado legislation that essentially initiated a moratorium on new drilling projects and continued commodity price volatility. 

On July 31, 2019, the Board held a special meeting to review the two viable competing offers it received and the detailed financial analysis of those offers that included consideration of the offer prices, the costs related to a bankruptcy filing mandated by one of those offers and the net result of acceptance of each offer on all creditors and stakeholders alike. The Board voted to accept the offer that did not require a mandatory bankruptcy filing and notified the prospective purchaser. Unfortunately, on August 8th, 2019, the prospective purchaser and its financial backers declined to accept the Company’s out of court restructuring proposal that contained the precise financial terms requested by them. The Company had one remaining potential purchaser that required a chapter 11 filing. 

The Debtors plan to conduct a post-petition marketing and sale process pursuant to section 363 of the Bankruptcy Code. The Debtors intend to sell substantially all of their assets in these Chapter 11 Cases to the highest and best bidder. Debtors have identified a candidate to be the stalking horse bidder in the sale process and are negotiating the terms of the purchase and sale agreement. 

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “McManigle Declaration”), Drew McManigle, the Debtors' Chief Restructuring Officer detailed the events leading to PetroShare’s Chapter 11 filing. Interestingly, the Declaration does not mention the negative impact of the Colorado regulatory environment that was emphasized by the Debtors' CEO above. The McManigle declaration states: "Since 2018, the Company’s biggest challenge has been a lack of liquidity and capital. To address those challenges, the Company initiated a series of efforts to improve its working capital position. In addition to the Prepetition Secured Facility and issuance of the Convertible Notes discussed above, the Company also undertook efforts to sell some of its assets to raise cash. This effort resulted in the sale of the Company’s non-operated oil and gas wells (the “Non-Operated Asset Sale”).

On February 27, 2019, the Company completed the Non-Operated Asset Sale, with an effective date of January 1, 2019….As a condition of that consent, the Prepetition Secured Lenders required that the proceeds of the Non-Operated Asset Sale be paid to an account controlled by Prepetition Secured Lenders, and that the Company grant the Prepetition Secured Lenders a security interest in the proceeds. Following the sale, the proceeds were applied by the Prepetition Secured Lenders to reduce balances owed to them under the terms of the Prepetition Secured Facility….Because the proceeds of the Non-Operated Asset Sale were applied only to the Prepetition Secured Facility, the Company was unable to use those proceeds to pay vendors or the holders of any other accrued liabilities. Some of those vendors have filed mechanic’s liens against the Company’s property interests as a result of the Company’s failure to pay the amounts due to the vendors. 

As discussed above, the Company is in default on the outstanding principal balances of the Convertible Notes and Prepetition Loan Documents. The Company’s liquidity need became even more acute when the Prepetition Secured Lenders filed the Foreclosure Action against all of the Company’s assets. The Company sought to stop or postpone the foreclosure sale and satisfy its obligations under the Prepetition Loan Documents through negotiations with the Prepetition Secured Lenders. However, negotiations with the Prepetition Secured Lenders were unsuccessful. The Company has been unable to access the debt or equity markets to obtain any additional funding during 2019, further exacerbating the Company’s liquidity issues."

About the Debtors

Petroshare is a Colorado corporation formed on September 4, 2012 to investigate, acquire, and develop crude oil and natural gas properties in the Rocky Mountain or mid-continent portion of the United States. On November 19, 2015, the Company closed its initial public offering of 4,600,000 shares of common stock at a price of $1.00 per share. The Company is publicly traded on the OTCQB under the stock ticker “PRHR”. The Company’s website is www.PetroSharecorp.com.

All of the Company’s properties are located in Colorado. Since 2016, the Company’s operational focus has been in the Wattenberg Field in the Denver-Julesburg Basin, or DJ Basin, in northeast Colorado. The Company has concentrated its efforts in areas where the geo-mechanical characteristics of the underlying formations offer the potential for greater returns on capital. The Company has placed particular emphasis on acquiring acreage in an area of the southern Wattenberg Field in Adams County and southwest Weld County, Colorado, along with an area southeast of the field, which the Company refers to collectively as the “Southern Core”.

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