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December 7, 2020 – The Debtors notified the Court that their Amended Joint Chapter 11 Plan of Liquidation was effective as of December 7, 2020 [Docket No. 496]. The Court had previously confirmed the Debtors’ Plan on November 30, 2020 [Docket No. 490].
On May 15, 2020, Gavilan Resources LLC and three affiliated Debtors (“Gavilan” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-32656 (Judge Marvin Isgur). At filing, the Debtors, who acquired, developedand produced oil and natural gas assets in the Eagle Ford shale play in south Texas, noted estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $500.0mn and $1.0bn.
The Debtors were formed in early 2017 and were owned prpeition by funds managed by Blackstone Energy Partners L.P. ("Blackstone").
The Debtors were represented by (i) Weil Gotshal & Manges LLP as local bankruptcy counsel, (ii) Vinson & Elkins, LLP as general bankruptcy counsel, (iii) Huron Consulting Services LLC as restructuring advisors, (iv) Lazard Frères & Co. LLC as investment banker and (v) Epiq Restructuring as claims agent. Both Weil Gotshal and Vinson & Elkins had also represented Gavilan in the Sanchez bankruptcy from its commencement in August 2019.
An Administrative Expense Claims Bar Date has been set at December 28, 2020
On October 16th, the Court approved the $50.0mn sale of substantially all of the Debtors' assets to onetime nemesis Mesquite Energy, Inc. (f/k/a Sanchez Energy Corporation) paving the way for the filing of a Plan of Liquidation further to which the sale proceeds are set to be distributed, that distribution being to the Debtors' prepetition RBL lenders who are owed in excess of $100.0mn. With the closing of both the Mesquite Sale and the Big Wells Sale, the Debtors will have successfully sold substantially all of their assets to, respectively, Mesquite Energy Inc and Crimson Resources LLC. Further to distributions and the wind down of the Debtors' estates, the Debtors’ appointed Liquidating Agent, will "effect the termination of the Debtors’ legal existence."
The Disclosure Statement provides: "The Debtors conducted an auction for substantially all of their assets …and designated Mesquite Energy, Inc. (f/k/a Sanchez Energy Corporation) (‘Mesquite’) as the bidder presenting the highest or best offer (the ‘Successful Bid’)….On October 16, 2020, the Court entered the Order (A) Approving Sale of Debtors’ Assets, (B) Authorizing Assumption and Assignment of Executory Contracts and Unexpired Leases, and (C) Granting Related Relief [Docket No. 361], approving the APA. Pursuant to the Plan, on the Effective Date, either (1) the Debtors shall each be liquidated, wound down and terminated, as provided in Section 5.9 of the Plan, or (2) the Debtors shall be merged together into one remaining Designated Debtor, which Designated Debtor shall be liquidated, wound down and terminated as provided in Section 5.9. The Debtors propose to appoint their current restructuring advisor, Huron Consulting Services LLC (‘Huron’) as the Liquidating Agent for each of the Debtors. The Liquidating Agent shall carry out and implement all provisions of the Plan after the Effective Date and wind down the Debtors’ estates."
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, see also the Liquidation Analysis below):
- Class 1 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is 100%.
- Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is 100%.
- Class 3 (“RBL Lenders Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $101,800,000 and estimated recovery is 60%. Treatment: Upon the closing of the Sale Transaction, holders of the RBL Lenders Claims shall receive their pro rata share of the Sale Proceeds. In addition, upon the Effective Date, the Initial Distribution shall be made by the Liquidating Agent to the RBL Agent, on behalf of the Prepetition RBL Secured Parties, shall be paid, pursuant to the Initial Distribution. Additional subsequent distributions may be made under the discretion of the Liquidating Agent to the extent any excess funds are available beyond those reserved for the wind-down process. The proof of claim of J. Aron & Company, LLC for $583,585.64 in respect of swap default settlement payments shall receive identical treatment to the RBL Lender Claims.
- Class 4 (“Second Lien Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
- Class 5 (“General Unsecured Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
- Class 6 (“Existing Gavilan Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
On November 25, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 473], which were as follows:
- Class 3 (“RBL Lender Claims”): 8 claim holders, representing $59,288,332.67 (100%) in amount and 100% in number, voted in favor of the Plan.
Mesquite Asset Sale
On October 16, 2020, the Court issued an order approving the $50.0mn Sale of Assets to Mesquite Energy, Inc. ("Mesquite") [Docket No. 361, with APA filed at Docket No. 366].
Mesquite will be perhaps be more familiar as the former Sanchez Energy Corporation ("Sanchez") which has itself only just emerged from bankruptcy, having barely avoided liquidation in its own extremely fractious Chapter 11 cases. Mesquite has also been something of a nemesis of the current Debtors, who largely blame a soured partnership with Mesquite for being in Chapter 11 in the first place.
Less than four years ago, the Blackstone-backed Debtors teamed up with Sanchez to collectively pay $2.3bn (split 50/50) to purchase Anadarko Petroleum's "Comanche Assets." A complicated set of joint operating, management and development agreements (see further below), however, effectively gave Sanchez control of both oil output and revenue streams, a whip hand that the Debtors argue Sanchez abused and which has led to a series of adversary proceedings in each of the Sanchez cases (the adversary proceedings survived the Sanchez emergence from bankruptcy) and the Debtors' cases.
In recent weeks the edge seems to have come off the shared animus, with the parties jointly requesting on September 30th that adversary proceedings be delayed noting that the "Parties are currently in the middle of several other processes and proceedings that may moot or resolve the claims and issues in dispute in this case. Those other proceedings include Gavilan’s asset auction, which is currently in process, and Plaintiffs’ efforts to reject the Joint Development Agreement in their own bankruptcy proceeding, which is also pending before this Court in Case No. 19-34508, In re Sanchez Energy Corporation et al."
It will undoubtedly help that the Debtors' cases and the Sanchez cases are being heard by the same judge, Marvin Isgur. It probably also helps that (i) Mesquite is genuinely under new ownership and its controversial former President and CEO Tony Sanchez III now gone and (ii) Mesquite's new owners, led by Apollo and Fidelity, have lost at least as much via their investments in Sanchez (and indirectly the Commanche Assets) as Blackstone has lost at Gavilan.
Goals of the Chapter 11 Filings
The Roberts Declaration (defined below) states: “The Debtors enter these chapter 11 proceedings with a plan to market their business and assets through a sale process (the ‘Sale Process’)… while continuing its pursuit of operatorship of the Comanche Assets via the Operatorship Dispute…The right to operatorship of the Comanche Assets is a valuable asset of the Debtors’ estates and I understand that the Debtors intend to vigorously pursue those rights as part of their own sales and restructuring efforts. I believe the outcome of the Operatorship Dispute will impact the value of the Debtors’ assets. If the Debtors are successful in obtaining operatorship, the structure of the Debtors’ business will change.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Roberts Declaration”), David E. Roberts, Jr., the Debtors’ Chief Executive Officer, detailed the events leading to Gavilan’s Chapter 11 filing. The Roberts Declaration states: “The precipitous decline in oil prices from the combined effect of the COVID-19 pandemic and the flooding of oil markets by warring international producers forced Gavilan into these chapter 11 proceedings. Since the fall of 2018, however, Gavilan has been entangled in, first, an increasingly unworkable relationship with Sanchez brought on by, among other things, Sanchez’s own financial difficulties; second, arbitration (and litigation) stemming from Sanchez’s defaults under the JDA (the ‘Operatorship Dispute’); and, ultimately, Sanchez’s own chapter 11 cases filed in August 2019.
Gavilan enters these chapter 11 proceedings with a plan to market its business and assets while continuing its pursuit of operatorship of the Comanche Assets via the Operatorship Dispute.
Gavilan, Sanchez, and UnSub are parties to the JDA. Sanchez was in Default, for two independent reasons, under the JDA for months – before Sanchez filed its own chapter 11 cases. Sanchez disputed the Defaults, forcing Gavilan to confirm the Defaults through a contractually mandated arbitration process. Gavilan started arbitration proceedings in February 2019 before Judge Susan Soussan (Gavilan Resources, LLC v. SN EF Maverick, LLC, et al., No. 01-19-0000-5228, American Arbitration Association).
Following the commencement of Sanchez’s chapter 11 proceedings, Gavilan sought relief from the automatic stay to continue the arbitration. Respectful of the stay and the breathing room it affords debtors, Gavilan waited for progress to be made on Sanchez’s own restructuring before prosecuting its motion to lift stay. In December 2019 and January 2020, as the continued uncertainty weighed on Gavilan’s own business, Gavilan agreed with Sanchez to move the arbitration proceedings to Sanchez’s chapter 11 cases so that the Operatorship Dispute could finally be resolved. Trial on the Operatorship Dispute commenced on March 9, 2020 but was adjourned at the Court’s suggestion so the parties could continue negotiations. After multiple delays due to circumstances of Sanchez’s chapter 11 cases, trial is set to continue on May 22 and 26, 2020.
On April 30, 2020, the Bankruptcy Court confirmed the chapter 11 plan proposed by Sanchez in its chapter 11 cases. As indicated, Sanchez has moved to reject the JDA and assume the JOAs in connection with its plan of reorganization. Sanchez’s plan has not yet become effective and it is unclear when Sanchez’s plan will go effective.
The right to operatorship of the Comanche Assets is a valuable asset of the Debtors’ estates and Gavilan intends to vigorously pursue those rights as part of its own sales and restructuring efforts. In fact, the timing of this filing was made sufficiently in advance of the continued hearings on the Operatorship Dispute so as not to jeopardize the trial dates and to protect Gavilan from any potential efforts by Sanchez to further delay the resolution of this matter.”
As have done many peer companies who have already filed for bankruptcy protection, the Debtors cite declining commodity prices as placing them on a slippery slope and COVID-19 for shoving them to the bottom. For these, Debtors, however, there is a third critical concern which has dogged them before their bankruptcy and threatens to become the most important distraction while in it: A difficult and litigious relationship with Sanchez Energy Corporation; “Sanchez” itself in Chapter 11. Sanchez's Plan was confirmed on April 30th and its effectiveness wouuld critically damage these Debtors by allowing Sanchez to reject/modify agreements relating to a large joint project in the Eagle Ford Shale (the "Comanche Assets").
As the Roberts Declaration states: "The right to operatorship of the Comanche Assets is a valuable asset of the Debtors’ estates and Gavilan intends to vigorously pursue those rights as part of its own sales and restructuring efforts. In fact, the timing of this filing was made sufficiently in advance of the continued hearings on the Operatorship Dispute so as not to jeopardize the trial dates and to protect Gavilan from any potential efforts by Sanchez to further delay the resolution of this matter."
In March 2017, the Debtors, together with several Sanchez affiliates, purchased the ‘Comanche Assets for approximately $2.3bn from Anadarko Petroleum (“Anadarko”). Gavilan paid Anadarko 50% of the purchase price, roughly $1.13bn, and acquired 50% of all of Anadarko’s interest in the Comanche Assets. One of the Sanchz affiliates ("UnSub") paid Anadarko $744.0mn for the other 50% of Anadarko’s proved developed producing ('PDP) assets, and 20% of Anadarko’s proved developed non-producing ('PDNP') assets and proved undeveloped (“PUD”) assets. The other Sanchez affiliate ("SN Maverick") paid Anadarko $394.0mn for the remaining 30% of Anadarko’s PDNP and PUD assets. In sum, 50% of the purchase price and 50% of the Comanche Assets for each of the Debtors and Sanchez.
The relationship between the Debtors and Sanchez is governed by a series of joint operating, management and development agreements; additionally both are party to a pair of gathering agreements (one for gas and one for gas PLUS natural gas liquids) with Springfield Pipeline LLC (“Springfield”). Although this may be a 50/50 partnership, Sanchez clearly has a greater responsibility for (and control of) the operational aspects of the project; with Sanchez now operating the Comanche Assets (wrongly argue these Debtors) and perhaps more importantly controlling the oil output and revenue streams. These arrangements have Sanchez collect payment for O&G sales and then (in theory) remit the Debtors' share to the Debtors. In its own Chapter 11, Sanchez is looking to have several of these interlocking agreements altered or rejected to the detriment of Gavilan. The key Gavilan/Sanchez agreements include:
- Joint Operating Agreements ("JOAs"): The pool the Comanche Assets for operating purposes, with the Debtors stating that "As of the date hereof, Sanchez continues wrongfully to operate the Comanche Assets under the JOAs." Sanchez has moved to assume the JOAs in its bankruptcy.
- Joint Development Agreement (the “JDA”): The JDA governs the management and operations of the Comanche Assets and sits atop the numerous JOAs, providing a framework to jointly manage and operate the Comanche Assets through a six-member “Operating Committee,” “Budgets and Work Plans,” and a right, by either Gavilan or SN Maverick, to divide operatorship after two years “for any reason.” Sanchez has moved to reject the JDA in its bankruptcy proceeding.
- Gathering Agreements: Gathering agreements with Springfield further to which Gavilan’s working interests are gathered in-field by Springfield pursuant to two separate gathering agreements – one for gas and natural gas liquids (“NGLs”), and one for oil.
- Marketing Agreements: Pursuant to three separate marketing agreements (one each for oil, natural gas, and NGLs) Sanchez picks up from the Springfield gathering system and markets Gavilan’s Production. At the end of the process, Sanchez remits to Gavilan Gavilan’s share of revenues net of severance taxes. Sanchez has also moved to reject the marketing agreements in its bankruptcy.
Prior to Sanchez's Chapter 11 filing, Gavilan asserted that Sanchez was in default in respect of the JDA, an assertion that Sanchez disputed and that led to Court required arbitration. Subsequent to the Sanchez Chapter 11 filing, the arbitration was moved to the Sanchez cases; trial of the dispute (the "Operatorship Dispute") is set to re-commence on May 22nd.
The Disclosure Statement [Docket No. 392] attached the following exhibits:
- Exhibit A: The Plan
- Exhibit B: The Debtors’ Prepetition Organizational Structure
- Exhibit C: Liquidation Analysis
- Exhibit D Release Provisions
Liquidation Analysis (see Exhibit C of Disclosure Statement [Docket No. 392] for notes)
About the Prepetition Debtors
According to the Debtors: "Headquartered in Houston, Texas, Gavilan Resources is a private company established in 2017 in partnership with Blackstone to acquire, develop and produce oil and natural gas assets in the Eagle Ford Shale play in South Texas.
Our foundational acquisition was the $2.2 billion purchase of assets from Anadarko Petroleum in coordination with Sanchez Energy Corporation and we are actively seeking to build our company through the acquisition of operated properties in the Eagle Ford Shale play. Today, we own approximately 77,000 net acres of leasehold and have current net production of approximately 32,000 barrels of oil equivalent per day.
Our management team has extensive technical expertise and experience efficiently operating at scale in U.S. unconventional shale resource plays in public and private companies."
Corporate Structure Chart
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