Alta Mesa Resources, Inc. – Notwithstanding (re)Agreed Asset Sale and Recent Filing of Plan, Court Grants Lengthy Exclusivity Extensions to Often Chaotic Cases

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April 21, 2020 – The Court hearing the Alta Mesa Resources cases extended the periods during which the Debtors have an exclusive right to file a Chapter 11 Plan, and solicit acceptances thereof, through and including July 7, 2020, and September 3, 2020, respectively [Docket No. 1573]. Absent the requested relief, the Plan filing and solicitation dates are scheduled to expire on May 12, 2020, and July 11, 2020, respectively.

When the Debtors requested the lengthy extensions on March 25th things looked dire indeed; with the presumptive Buyer (BCE-MACH III LLC or "BCE-Mach") of the Debtors' assets pulling out of an agreed $320.0mn deal and the Debtors turning to the Court to enforce the terms of the sale. Since that date, there is a little more certainty (the Debtors actually filed a Plan of Liquidation on April 17th) for these [more than] occasionally shambolic Chapter 11 cases and a lot less money for the Debtors' Chapter 11 estates; with the Buyer now agreeing to consummate the sale at a price of $220.0mn. 

The Debtors are now aiming for a Plan confirmation hearing well in advance of the expiration of these now extended exclusivity periods (ie May 27th); but with these Debtors one never knows and Judge Marvin Isgur was content to leave the lengthy extensions as requested.

The Motion

As previously reported in respect of the Debtors’ motion requesting the extensions [Docket No. 1428] “On March 3, 2020, the AMR/AMH Debtors, the KFM Debtors, the Committee, and the AMH Debtors’ ad hoc noteholder group conducted mediation before Judge Jones. During the mediation, the parties made significant progress toward an agreement on the terms of a plan of liquidation and an orderly wind-down of the estates. Subsequent to the mediation, the parties were working diligently to reach an agreement with the AMH Debtors’ secured lenders on such terms, and were in the process of preparing a plan of liquidation for filing. During this time, however, the Buyer informed the AMR/AMH Debtors that they would not consummate the Sale on the timeline previously anticipated. As set forth in the Debtors’ motion for entry of an order enforcing the PSAs and Sale Orders, the Debtors assert that the Buyer’s failure to timely consummate the Sale stems from the Buyer’s breaches of the PSAs.

On March 12, 2020, the Court held a status conference during which the Buyer informed the Court that it was uncertain whether it would be able to proceed with the Sale under the terms set forth in the PSAs. Accordingly, as of the date of this Motion, there is significant uncertainty surrounding the date of the Sale closing (or the potential closing of any alternative sale of the Assets, if necessary) and the timeline for the subsequent wind-down of the AMR/AMH Debtors’ estates pursuant to a plan of liquidation. Nevertheless, the AMR/AMH Debtors and their advisors continue to work productively with their various stakeholders toward a value-maximizing transaction and orderly and efficient wind-down of the estates, including by engaging in discussions with both the Buyer and potential alternative transaction counterparties, and continuing their efforts to enforce their rights against Buyer.”

Further Background on BCE-Mach Acquisition of Debtors' Assets

[As previously reported] April 2, 2020 – Alta Mesa Resources, Inc. and its subsidiary Debtors (“AMR” or the “Initial Debtors,” and together with Kingfisher Midstream, LLC  and its subsidiary Debtors, or "the KFM Debtors, the “Debtors”) filed an emergency motion requesting authorization to enter into and perform under a pair of modified asset purchase agreements with the purchaser of both of the AMR and KFM assets, BCE-MACH III LLC ("BCE-Mach" or the “Purchaser”) [Docket No. 1478]. Executed versions of the revised asset purchase agreements are attached in this motion. 

The modified APAs reduce the purchase price to be paid by BCE-Mach from $320.0mn to $220.0mn with an adjustment (resulting in a range of $200.0m to $240.0mn) based on crude oil priced in May 2020. The motion cites the "grim realities of the current economic environment and conditions in the oil and gas industry," as precipitating the change, but many watchers will cite the "grim realities" of a messy sales process and a questionable purchaser who after several delays of its own making left the Debtors' sales efforts exposed to the coronavirus. As a result of those delays, the Debtors were given Court approval (the same Court that issued sales orders in respect of what was loudly criticized as a hasty and bid-chilling sales process to an alleged "insider" in January) to restart their marketing process; except that the "grim reality" was that in the current economic environment the value of the Debtors' assets had dropped precipitously, leaving BCE-Mach again the Debtors' choice…albeit at a considerably reduced price. It will be interesting to see in coming days whether the coronavirus has dampened the will of what have been many objecting voices throughout the Debtors' Chapter 11 cases and sales process.

Who said things couldn't get worse? Even before COVID-19 this was a truly messy and acrimonious transaction. As we summed up previously: "In sum, one company that filed bankruptcy in two groups four months apart (the Initial Debtors filing in September 2019) that are having their cases jointly administered to distribute assets sold to the same purchaser through two separate asset purchase agreements, albeit under separate Plans and Disclosure Statements. Fair to say, this has left a trail of angry stakeholders."  And those were the good old days.

By way of more-detailed reminder, the KFM Debtors filed for bankruptcy on January 12, 2020 and their cases are now being jointly administered with the chapter 11 cases of the Initial Debtors who filed for Chapter 11 on [what else] September 11, 2019. Shortly (in the view of many objecting parties, way too shortly) after the KFM Debtors filed for bankruptcy, the Debtors held a joint auction of their respective assets (ie the AMR assets and the KFM assets) on January 15, 2020.

Further to that auction, BCE-Mach was designated as the successful bidder in respect of substantially all of the Debtors' assets and holders of the Debtors' 7.875% senior notes due 2021 (the "Ad Hoc Group") were named as the back-up bidder [Docket No. 888]. Notwithstanding that the Debtors' AMH Assets and KFM Assets were covered by separate asset purchase agreements (with that construct continuing with the revised agreements), the auction was conducted as if the assets were "one package;" the transcript noting: "The Debtors' assets that are to be auctioned off today will be considered as one package for all of the assets. There will be no need for any bidder to allocate the value of their bids." 

Interestingly, the Debtors' April 2nd emergency motion does not mention renewed interest from the credit-bidding Ad Hoc Group who were left fuming at the section 363 altar when their bid, which they and others had argued was more certain than that of alleged "insider" BCE-Mach, was rejected by the Debtors. Ironically, the shambolic and oft-delayed sale to BCE-Mach may have kept those spurned senior creditors from being hit by the COVID-19 bus.

On January 24, 2020, the Bankruptcy Court entered orders approving the “joint” sales to BCE-Mach. At the time, the Debtors stated that they expected the sales to close on or around February 12, 2020. Shortly before that date, however, BCE-Mach asked that the closing be delayed until February 28, 2020, citing "the administrative convenience of an end-of-month closing versus a mid-month closing and concerns about the parties’ preparedness to close by the target date." Then, as the end of February approached, BCE-Mach notified the Debtors that "due to late-breaking issues between the Buyer and certain potential alternative financing providers," there would have to be another delay, this time until March 9, 2020. The rest is coronavirus history.

Please see our other extensive coverage on why, inter alia, (i) the Debtor’s Official Committee of Unsecured Creditors (the “Committee”) filed a motion to convert the Debtors’ Chapter 11 cases to cases under Chapter 7 [Docket Nos. 1315]  arguing that prepetition lender Wells Fargo was exerting "dictatorial control" and that “the AMH Debtors’ Chapter 11 cases have never followed traditional, normative patterns. The process has been chaotic, and the lack of direction and purpose has come at an enormous administrative expense…" and (ii) the Committee urged the Debtors to reject the BCE-Mach bid as "from an insider, board member, and substantial indirect equity owner of the Debtors," in favor of that of the Ad Hoc Group [Docket No. 761]and (iii) Bank of Texas, a lender to both the AMH Debtors and KFM Debtors, objected to a rushed sale process as a "confusing, disjointed process with the overhanging uncertainty caused by the litigation between Debtors and KFM and related entities…[yes the Debtors were suing each others, and] a rush to the end that can only benefit the stalking horse, and is at the expense of creditors. [Docket No. 846]

The Current Emergency Motion

The motion states, “Given the current volatility in the commodity markets and instability in the economy at large, it is imperative that the Debtors monetize their assets quickly… After the original sale failed to close on the target closing date and with the permission of the Court, the Debtors have re-marketed their assets to generate new alternatives. As discussed in greater detail in the declaration of John Cesarz of Perella Weinberg Partners, the Debtors’ investment banker, filed contemporaneously herewith the results of such remarketing process reflect the grim realities of the current economic environment and conditions in the oil and gas industry. While the Debtors received a handful of indications of interest from potential purchasers, these non-binding proposals offered purchase consideration below what is contemplated by the Modified PSAs and/or are incapable of being consummated on an expedited basis (if they are even capable of being consummated at all). In contrast, a sale to the Buyer on the terms reflected in the Modified PSAs will yield sale consideration that, while less than the consideration offered under the Original PSAs, will provide a significant recovery to the Debtors’ creditors (with an opportunity to share in the upside from any rebound in oil prices). Simply put, the transactions contemplated by the Modified PSA represent the Debtors best available path to maximizing the value of their assets under the current challenging circumstances.

The target closing date under the Original PSAs was originally February 12, 2020.The Sale, however, has not yet been consummated. Shortly before that date, the Buyer suggested that closing be delayed to February 28, 2020, citing the administrative convenience of an end-of-month closing versus a mid-month closing and concerns about the parties’ preparedness to close by the target date. As the new target closing date approached, Buyer’s counsel notified Debtors’ counsel that the Buyer would not be able to close on February 28 due to late-breaking issues between the Buyer and certain potential alternative financing providers. The Buyer stated that it would instead target a March 9, 2020 closing date. 

Shortly thereafter, circumstances changed dramatically—a precipitous decline in commodity prices(including as a result of planned production increases announced following the March 2020 OPEC+ meetings) and a global decrease in demand brought on by the COVID-19 pandemic roiled the global economy (and the oil and gas industry specifically)and further called into question the feasibility of closing the Sale. In light of the changed circumstances, the Buyer has taken the position that that it is no longer able to close on the terms set forth in the Original PSAs. 

As it became apparent that the Buyer was unwilling and/or unable to close the sale transactions on the terms reflected in the Original PSAs, the Debtors filed a motion seeking to enforce the terms of the Original PSAs and confirm their ability to exercise various rights and remedies thereunder, and requested an emergency hearing on such motion. At that hearing, with the consent of the Buyer, the Court authorized the Debtors to conduct a new marketing process (the “Remarketing Process”) for the Assets. The Debtors’ advisors contacted approximately 70 parties, including all counterparties that had signed a confidentiality agreement during the original marketing effort in 2019, as well as seven additional parties who had actively reached out to the Debtors’ advisors since then. Potential buyers were asked to submit alternative proposals by March 24, 2020, which could be for any or all of the Assets. The Debtors received several indications of interest during the Remarketing Process, including six proposals contemplating a joint acquisition of the Assets of the AMH/AMR Debtors and KFM Debtors (and four proposals involving only the KFM Assets), in addition to a revised proposal from the Buyer. (Cesarz Decl., ¶13).

In the meantime and on a parallel path, the Debtors engaged the Buyer in extensive, good-faith negotiations on modifications to the terms of the Sale that would enable the Buyer to close while also maximizing the value of the Assets. Those negotiations resulted in the Modified PSAs, which provide for the following modifications to the terms of the Sale”

Modified terms of the PSAs are as follows:

The purchase price will be reduced from $320.0mn to $220.0mn, subject to certain upward or downward adjustments based on the settlement price as of closing for light sweet crude oil prompt month futures contract reported by the New York Mercantile Exchange for calendar month May 2020 (NYMEX: CLK20), with a maximum purchase price of $240.0mn and a minimum purchase price of $200.0mn, prior to application of the existing purchase price adjustments that were included in the Original PSA (and remain in the Modified PSAs).

The Debtors will receive a 5% Overriding Royalty Interest on the existing Wells (the “ORRI”) conditioned on the crude oil price exceeding $45.00 per barrel, which will be triggered if and when oil prices exceed $45.00 per barrel for 15 consecutive trading days. The ORRI term is for the earlier of three years from closing or when the ORRI reaches $25.0mn.

If (a) Buyer’s conditions to closing in the AMH/AMR Debtors’ or KFM Debtors’ Original PSAs (other than the cross-conditions and conditions relating to the sale order) are satisfied and closing does not occur as of the earlier of (i) April 10, 2020, and (ii) two (2) Business Days after the entry by the Court of an order approving the Modified PSAs and the closing pursuant to the terms of the Modified PSAs, then, upon written notice from the applicable Debtors to Buyer (which notice may be delivered in Debtors’ sole discretion), the applicable Debtors have the option to cause the economic changes to the Original PSAs effected by the Modified PSAs to become void (i.e., the terms would revert to the terms reflected in the Original PSA); and (b) if Buyer’s conditions to closing in the Original PSA (other than the cross-conditions) for the other Debtor group (i.e., the KFM Debtors, in the case of the AMH/AMR Debtors’ amendment, and the AMH/AMR Debtors, in the case of the KFM Debtors’ amendment) are also satisfied and closing does not occur as of two (2) Business Days after the entry by the Court of an order approving the Modified PSAs and the closing pursuant to the terms of the Modified PSAs, then (x) Buyer shall be in material breach of the applicable Original PSA and (y) Seller shall be entitled to immediately terminate the applicable Original PSA and be entitled to receive and retain the Deposit and Buyer waives any defense thereto.

In addition, the amendments to the Original PSAs make clear that (a) no party is waiving (i) any breach of or non-performance under the Original PSAs by any other Party occurring on or prior to the date of amendments to the Original PSAs or (ii) any rights or remedies as may exist under the Original PSAs as of the date of amendments to the Original PSAs and (b) immediately upon closing, (i) any alleged breach of or non-performance under the Original PSAs by either party occurring on or prior to or on the date of the amendments to the Original PSAs that have been expressly asserted in a writing delivered to such Party by the other Party shall be deemed waived by the other party and (ii) each of Buyer and the Debtors shall be deemed to have released and discharged the other from any and all causes of action, based on or related to any alleged breach of or non-performance under the Original PSAs deemed waived pursuant to the foregoing clause (b)(i) above.

The motion continues, “Except for the modifications detailed herein, the material terms of the Sale as documented in the Original PSAs will remain unchanged. Among other things, the allocation of the purchase price among the AMH Debtors and KFM Debtors under the Modified PSAs remains the same as the Original PSAs, i.e., a 72.5% allocation to the AMH Debtors and a 27.5% allocation to the KFM Debtors. Based on the reduced purchase price of $220 million, the AMH Debtors will be allocated $159.5 million and the KFM Debtors will be allocated $60.5 million. Additionally, the Debtors are not waiving any of their rights and remedies under the Original PSAs in the event that the transactions contemplated by the Modified PSAs are not timely consummated. All of the indications of interest received during the Remarketing Process had a lower headline purchase price than $220 million. Through the ORRI, the Buyer’s revised proposal offers the Debtors’ estates the ability to share in the upside from a rebound in oil prices—a feature absent from the other indications of interest. In addition, considering the substantial time and effort that would be required to consummate any alternative transaction, the Debtors and their advisors lack confidence that the other potential buyers would be able to close on a timely basis in this challenging market, and are concerned about the Debtors’ ability to fund the additional expenses that necessarily would result from delay (in addition to increased transaction costs from negotiating and documenting a new deal).”

Key Amended Terms of AMH PSA:

  • Seller: Alta Mesa Holdings, LP, a Texas limited partnership (“AMH”), Alta Mesa Holdings GP, LLC, a Texas limited liability company (“AMH GP”), OEM GP, LLC, a Texas limited liability company (“OEM”), Alta Mesa Finance Services Corp., a Delaware corporation (“AMFS”), Alta Mesa Services, LP, a Texas limited partnership (“AMS”), and Oklahoma Energy Acquisitions, LP, a Texas limited partnership (“OEA”, and, together with AMH, AMH GP, OEM, AMFS and AMS, collectively “Seller”)
  • Buyer: BCE-Mach III LLC
  • Purchase Price: The consideration for the transfer of the Assets and the transactions contemplated hereby shall be (a) the assumption of the Assumed Obligations, plus (b) subject to the remaining provisions of this Section 3.1 and the adjustment provisions of this Agreement, an amount equal to $159.5mn to be paid in cash by Buyer to Seller, by wire transfer in same day funds at Closing as provided for in this Agreement, plus (c) the Reserved ORRI, minus (d) the KFM ORRI (the “Purchase Price”). At Closing, if the WTI Price is (i) higher than the WTI Baseline as of the WTI Reference Date, then the Purchase Price shall be increased by an amount equal to the product of (A) the WTI Incremental Amount, multiplied by (B) each whole cent ($0.01) that the WTI Price is in excess of the WTI Baseline as of the WTI Reference Date; (ii) lower than the WTI Baseline as of the WTI Reference Date, then the Purchase Price shall be decreased by an amount equal to the product of (A) the WTI Incremental Amount, multiplied by (B) each whole cent ($0.01) that the WTI Price is below the WTI Baseline as of the WTI Reference Date; or (iii) equal to the WTI Baseline as of the WTI Reference Date, then the Purchase Price shall be an amount equal to $159.5mn; provided that any such increase or decrease to the Purchase Price, as applicable, shall in no event exceed $14.5mn.

Key Amended Terms of KFM PSA:

  • Seller: Kingfisher Midstream, LLC, a Delaware limited liability company (“KFM”), Oklahoma Produced Water Solutions, LLC, a Delaware limited liability company (“OPWS”), Kingfisher STACK Oil Pipeline, LLC, a Delaware limited liability company (“KSOP”), and Cimarron Express Pipeline, LLC, a Delaware limited liability company (together with KFM, OPWS and KSOP, collectively “Seller”)
  • Buyer: BCE-Mach III LLC
  • Purchase Price: The consideration for the transfer of the Assets and the transactions contemplated hereby shall be (a) the assumption of the Assumed Obligations, (b) subject to the remaining provisions of this Section 3.1 and the adjustment provisions of this Agreement, an amount equal to $60.5mnn to be paid in cash by Buyer to Seller, by wire transfer in same day funds at Closing as provided for in this Agreement and (c) the KFM ORRI (the “Purchase Price”). At Closing, if the WTI Price is (i) higher than the WTI Baseline as of the WTI Reference Date, then the Purchase Price shall be increased by an amount equal to the product of (A) the WTI Incremental Amount, multiplied by (B) each whole cent ($0.01) that the WTI Price is in excess of the WTI Baseline as of the WTI Reference Date; (ii) lower than the WTI Baseline as of the WTI Reference Date, then the Purchase Price shall be decreased by an amount equal to the product of (A) the WTI Incremental Amount, multiplied by (B) each whole cent ($0.01) that the WTI Price is below the WTI Baseline as of the WTI Reference Date; or (iii) equal to the WTI Baseline as of the WTI Reference Date, then the Purchase Price shall be an amount equal to $60.5mn; provided that any such increase or decrease to the Purchase Price, as applicable, shall in no event exceed $5.5mn.

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