Lonestar Resources US, Inc. – Court Confirms Prepackaged Plan which Sees $250mn of 2023 Notes Converted to 96% of Emerged Equity

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November 12, 2020 – The Court hearing the Lonestar Resources US cases confirmed the Debtors’ Joint Prepackaged Plan of Reorganization [Docket No. 219].

On September 30, 2020, Lonestar Resources US, Inc. and 21 affiliated Debtors (NASDAQ: LONE; “Lonestar” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-34805. At filing, the Debtors, an independent E&P focused on unconventional oil, natural gas liquids and natural gas properties in the Eagle Ford Shale in Texas, noted estimated assets of $560.0mn and estimated liabilities of $626.3mn.

Prepackaged Plan and Restructuring Support Agreement Overview

The Debtors’ memorandum in support of Plan confirmation [Docket No. 188] provides the following pre-confirmation hearing summation: “Less than two months after commencing these chapter 11 cases (the ‘Chapter 11 Cases’) the Debtors are seeking confirmation of the Plan, which preserves the Debtors’ business and enhances their value by substantially deleveraging the Debtors’ balance sheet. Among other things, the Plan eliminates approximately $390.0 million of funded debt obligations and preferred equity, which will allow the Debtors to focus on long-term growth prospects and their competitive position in the market, and emerge from the Chapter 11 Cases as a stronger company. 

The Plan is the product of months of good-faith, arms’-length negotiations among the Debtors, the Prepetition RBL Agent, the Prepetition RBL Lenders, and the Ad Hoc Noteholders Group, which resulted in an agreement on a global restructuring as memorialized into that certain Restructuring Support Agreement, dated as of September 14, 2020, by and among the Debtors, the Prepetition RBL Agent, the Consenting RBL Lenders, and the Consenting Noteholders (as may be amended from time to time, the ‘RSA’) and thereby paved the way for expeditious and value-maximizing prepackaged cases.

In a September 14th press release notifying the market of the execution of a restructuring support agreement (the "RSA" or "Support Agreement," attached to the Plan as Exhibit A) and the RSA's requirement that it file these prepackaged Chapter 11 cases by September 30th, Lonestar stated: "that it and certain of its direct and indirect wholly-owned domestic subsidiaries…have entered into a Restructuring Support Agreement (the 'Support Agreement') with its largest stakeholders that will eliminate approximately $390 million in aggregate debt obligations and preferred equity interests. 

Under the terms of the Support Agreement, approximately $250 million of the Company’s 11.250% Senior Notes due 2023 (the 'Notes') will be converted to equity and accrued interest thereon will be extinguished. In addition, lenders under the Company’s revolving credit facility who agree to accept the Plan (as defined below) will, among other things, receive their pro rata share of warrants (the 'New Warrants') to purchase up to 10% of the new equity interests in the Company (subject to dilution only by the issuance of new equity interests under a management incentive plan ('MIP Equity')), revolving loans under the exit revolving credit facility, and term loans under the second-out exit term facility. Holders of preferred equity interests in the Company will receive their pro rata share of 3% of the new equity interests in the Company (subject to dilution by the MIP Equity and the New Warrants) and holders of existing Class A Common Stock in the Company will receive their pro rata share of 1% of the new equity interests in the Company (subject to dilution by the MIP Equity and New Warrants). 

The Company has already obtained support for the proposed transactions from lenders holding 100 percent of the aggregate principal amount outstanding under its revolving credit facility, noteholders holding approximately 67.1 percent of the aggregate principal amount outstanding under its Notes [81% as of September 28th], and holders of 100 percent of its preferred equity interests."

The Disclosure Statement adds: “Under the terms of the Restructuring Support Agreement, the Restructuring Support Parties agreed to deleveraging transactions (the ‘Restructuring’) to eliminate approximately $390 million of funded debt obligations and preferred equity interests, of the Debtors through the proposed Plan…The Restructuring contemplates the following transactions:

  • Funding of the Cases; Hedges. The Chapter 11 Cases will be funded with cash on-hand and certain proceeds resulting from the consensual termination of the Debtors’ hedging arrangements (the ‘Hedges’) with the Consenting RBL Lenders or their Affiliates prior to the Petition Date (the ‘Hedge Monetization’).
  • Exit Facilities. On the Effective Date, the Reorganized Debtors will enter into (a) a first- out senior secured revolving credit facility in an amount equal to 80% of the aggregate outstanding principal amount of loans and letters of credit under the Prepetition RBL Facility…held by Prepetition RBL Lenders…that vote to accept the Plan; provided that, on the Effective Date, the aggregate principal amount of the new revolving credit facility shall not be less than $152 million (the 'Exit Revolving Credit Facility'), (b) a second-out senior-secured term loan credit facility in an amount equal to 20% of the aggregate outstanding principal amount of loans and letters of credit under the Prepetition RBL Facility held by Prepetition RBL Lenders that vote to accept the Plan (the 'Exit Second Out Term Loan Facility), and (c) to the extent any Prepetition RBL Lenders do not vote to accept the Plan, a last-out senior-secured term loan credit facility in an amount equal to 100% of the aggregate outstanding principal amount of loans and letters of credit under the Prepetition RBL Facility held by such Prepetition RBL Lenders that do not vote to accept the Plan (the 'Exit Last Out Term Loan Facility').
  • Prepetition RBL Lenders. On the Effective Date, in addition to the reimbursement described in Article V.U of the Plan, (i) each Holder of an Allowed Prepetition RBL Claim that votes to accept the Plan will receive its Pro Rata share of: (A) Cash in an amount equal to all accrued and unpaid interest (calculated at the non-default rate so long as the Restructuring Support Agreement has not been terminated), fees, and other amounts (excluding amounts owed for principal, undrawn letters of credit and contingent reimbursement and indemnification obligations) owing to the Prepetition RBL Secured Parties under the Prepetition RBL Credit Agreement through the Effective Date, as set forth in the Prepetition RBL Loan Documents, to the extent not previously paid (the 'Prepetition RBL Cash Distributions'); (B) revolving loans under the Exit Revolving Credit Facility (the “Exit Revolving Loans”); (C) warrants (the 'New Warrants') to purchase up to 10% of the new equity interests (the 'New Equity Interests') in Reorganized Parent authorized to be issued on or after the Effective Date pursuant to the Plan and the Amended/New Organizational Documents (subject to dilution only by the MIP Equity (defined below)), the terms and conditions of which are set forth on the Warrnts Term Sheet attached as Exhibit 2 to the Plan Term Sheet; and (D) term loans under the Exit Second Out Term Loan Facility (the 'Exit Second Out Term Loans'), and (ii) each Holder of an Allowed Prepetition RBL Claim that does not vote on the Plan or votes to reject the Plan will receive its Pro Rata share of: (A) the Prepetition RBL Cash Distribution and (B) term loans under the Exit Last Out Term Facility (the 'Exit Last Out Term Loans').
  • Prepetition Noteholders. On the Effective Date, each Holder of an Allowed Prepetition Notes Claim will receive its Pro Rata share of 96% of the New Equity Interests Pool (subject to dilution by the MIP Equity and any issuances of New Equity Interests upon the exercise of the New Warrants).
  • General Unsecured Creditors. On or as soon as practicable after the earliest to occur of the Effective Date and the date a General Unsecured Claim becomes due in the ordinary course of business, each Holder of an Allowed General Unsecured Claim will receive payment in full in Cash on account of its Allowed General Unsecured Claim or such other treatment as would render such claim unimpaired (in each case except to the extent that a holder of a General Unsecured Claim agrees to less favorable treatment).
  • Preferred Equity Interests. On the Effective Date, in accordance with the terms of the Preferred Equity Side Letter, all existing Series A-1 Preferred Stock (the 'Old Parent Preferred Interests') of the Parent will be cancelled, and each Holder of Allowed Old Parent Preferred Interests will receive on account of such Old Parent Preferred Interests its pro rata share of 3% of the New Equity Interests (subject to dilution by the MIP Equity and any issuances of New Equity Interests upon the exercise of the New Warrants).
  • Common Equity Interests. On the Effective Date, all existing Class A Common Stock (the “Old Parent Common Interests”) of the Parent will be cancelled, and each Holder of an Allowed Old Parent Common Interests will receive on account of the Old Parent Common Interests, its pro rata share of 1% of the New Equity Interests (subject to dilution by the MIP Equity and any issuances of New Equity Interests upon the exercise of the New Warrants).
  • Management Incentive Plan. On or before the 60th day following the Effective Date or as soon as reasonably practicable thereafter, the Reorganized Parent will enter into a management incentive plan (the 'Management Incentive Plan'), which will (a) reserve 8% of the New Equity Interests (or restricted stock units, options, or other rights exercisable, exchangeable, or convertible into such New Equity Interests) on a fully diluted basis (the 'MIP Equity'), for awards to certain members of senior management to be determined by the directors of the initial board or other governing body of the Reorganized Parent (the 'New Board') and (b) otherwise contain terms and conditions (including the form of awards, allocation of awards, vesting and performance metrics) to be determined by the New Board."

Events Leading to the Chapter 11 Filing

The Debtors' Disclosure Statement provides: “[B]eginning in 2018, the Debtors began to experience significant revenue, cash flow, and liquidity challenges, due in large part to the decrease in market price for crude oil and natural gas. Crude oil prices have been extremely volatile since 2019 and… decreased even more significantly in the early part of 2020, at times reaching near or at the lowest prices ever recorded in the United States. Declining revenues have made it increasingly difficult for the Debtors to continue to service their debt obligations.

The decline of commodity prices that began in mid-2014 was exacerbated in 2020 due to a number of factors, including but not limited to: (a) weakened demand for oil, natural gas and NGLs in response to the worldwide COVID-19 outbreak; (b) a failure by the Organization of the Petroleum Exporting Countries (“OPEC”) and a group of other oil producing nations led by Russia to agree on oil production cuts in response to the COVID-19 outbreak; (c) Saudi Arabia’s announcement, following the events referenced in clause (b), that it would increase production and cut oil prices via a strong supply increase; and (d) volatility in oil price markets due to oversupply, lack of available storage capacity, and calls by investors for E&P companies to reduce current year development capital spending.

The depressed pricing environment has continued for longer than expected and has affected the Debtors just as it has affected the industry as a whole. The Debtors’ average realized prices for the first half of 2020 have decreased 44% for crude oil, 31% for natural gas and 47% for NGLs, in each case, as compared with 2019 realized prices. These low prices resulted in significant negative impacts on revenues, profitability, cash flows and proved reserves, and ultimately led to asset impairments and a reduction in the Debtors’ capital spending program.

Even with Hedges in place, these challenges, among others, have caused a significant decline in the Debtors’ financial health. To illustrate, the Debtors’ revenue has declined from approximately $93.0 million to approximately $54.3 million, while net income has declined from a net loss of approximately
$49.5 million in the first half of 2019 to a net loss of $156.0 million in the first half of 2020. The Debtors also recognized a nearly $200.0 million impairment on the value of their oil and gas properties due to low commodity prices, a less favorable operating environment than years past in the Eagle Ford, and worse than expected well results.

 As a result of these challenges, the Debtors began to face significant liquidity concerns and were unable to comply with certain covenants required under their debt agreements….The borrowing base redetermination under the Prepetition RBL Facility also reduced the borrowing base from $290.0 million to $225.0 million, which resulted in a $60.4 million borrowing base deficiency. The Debtors expect, as of the Petition Date, they will have total available liquidity of approximately $35.7 million (including approximately $30.5 million of proceeds from the Hedge Monetization). As of August 2020, the Debtors have a current liabilities balance of approximately $69.0 million."

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 Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. 
  • Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. 
  • Class 3 (“Secured Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 4 (“Prepetition RBL Claims”) is impaired and entitled to vote on the Plan. Expected recovery is 100%. In addition to the reimbursement described in Article V.U of the Plan:  

(i) each Holder of an Allowed Prepetition RBL Claim that votes to accept the Plan will receive in full satisfaction, settlement, discharge and release of, and in exchange for, such Allowed Prepetition RBL Claim its respective Pro Rata share of the following: (A) the Prepetition RBL Cash Distribution, to the extent not previously paid; (B) the Exit Revolving Loans; (C) the New Warrants; and (D) the Exit Second Out Term Loans; and

(ii) each Holder of an Allowed Prepetition RBL Claim that votes to reject the Plan or abstains from voting on the Plan will receive in full satisfaction, settlement, discharge and release of, and in exchange for, such Allowed Prepetition RBL Claim its respective Pro Rata share of the following: (A) the Prepetition RBL Cash Distribution, to the extent not previously paid; and (B) the Exit Last Out Term Loans.

  • Class 5 (“Prepetition Notes Claims”) is impaired and entitled to vote on the Plan. Expected recovery is 31.5%. Each Holder of an Allowed Prepetition Notes Claim will receive, in addition to the reimbursement described in Article V.U and Article V.V of the Plan, its Pro Rata share of 96% of the New Equity Interests Pool (subject to dilution by the MIP Equity and any issuances of New Equity Interests upon the exercise of the New Warrants).
  • Class 6 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 7 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 8 (“Old Parent Preferred Interests”) is impaired and entitled to vote on the Plan. Expected recovery is 2.6%. In accordance with the terms of the Preferred Equity Side Letter, the Old Parent Preferred Interests will be cancelled, and each Holder of Old Parent Preferred Interests will receive, on account of such Old Parent Preferred Interests, its Pro Rata share of 3% of the New Equity Interests Pool (subject to dilution by the MIP Equity and any issuances of New Equity Interests upon the exercise of the New Warrants).
  • Class 9 (“Old Parent Common Interests”) is impaired and entitled to vote on the Plan. Expected recovery is <1%. Each Holder of Old Parent Common Interests will receive, on account of such Old Parent Common Interests, its Pro Rata share of 1% of the New Equity Interests Pool (subject to dilution by the MIP Equity and any issuances of New Equity Interests upon the exercise of the New Warrants). For the avoidance of doubt, Unexercised Equity Interests shall be deemed automatically cancelled as of the Effective Date and Holders of Unexercised Equity Interests shall not receive any recovery on account of such Unexercised Equity Interests.
  • Class 10 (“Old Lonestar Subsidiary Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.

Voting Results

On November 6, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 187], which were as follows:

  • Class 4 (“Prepetition RBL Claims against all Applicable Debtors”): 9 claim holders, representing $285,397,364.00 in amount and 100% in number, accepted the Plan.
  • Class 5 (“Prepetition Notes Claims against all Applicable Debtors”): 75 claim holders, representing $237,733,000.00 in amount and 100% in number, accepted the Plan.
  • Class 8 (“Old Parent Preferred Interests against all Applicable Debtors”): 104,893.00 (shares) (or 100%) in amount, accepted the Plan.
  • Class 9 (“Old Parent Common Interests against all Applicable Debtors”): 969,997.00 (shares) (or 83.63% in amount), accepted the Plan. 189,839.00 (shares) (or 16.37% in amount) rejected the Plan.

Key Documents:

The Disclosure Statement [Docket No. 28] attached the following documents:

  • Exhibit A: Plan
  • Exhibit B: Organizational Structure Chart
  • Exhibit C: Liquidation Analysis 
  • Exhibit D: Financial Projections 
  • Exhibit E: Valuation Analysis

The Debtors filed Plan Supplements at Docket Nos. 160, 190 and 202, which attached the following documents:

Docket No. 160

  • Schedule 1: Form of Exit Facilities Credit Agreement
  • Schedule 2: Forms of Amended / New Organizational Documents
  • Schedule 3: Schedule of Litigation Claims
  • Schedule 4: Form of New Employment Contracts
  • Schedule 5: Form of New Warrants
  • Schedule 6: Members of New Board
  • Schedule 7: Schedule of Rejected Executory Contracts and Unexpired Leases
  • Schedule 8: Form of Registration Rights Agreement

Docket No. 190

  • Amended Schedule 2: Redlines of Forms of Amended/New Organizational Documents
  • Amended Schedule 4: Form of New Employment Contracts
  • Amended Schedule 6: Revised Members of New Board

Docket No. 202

  • Amended Schedule 1: Redline of Form of Exit Facilities Credit Agreement
  • Amended Schedule 5: Redlines of Forms of New Warrants
  • Amended Schedule 8: Redline of Form of Registration Rights Agreement

Significant Prepetition Shareholders

  • Chambers Energy Capital III, LP: 100% of the Series A-1 Preferred Stock 
  • SN UR Holdings LLC: 6% of Common Stock

Liquidation Analysis (see Exhibit C to Disclosure Statement for notes)

Corporate Structure Chart

About the Debtors

According to the Debtors: “Headquartered in Fort Worth, Texas, Lonestar's focus is on the volatile crude oil window of the Eagle Ford Shale, where we anticipate spending almost all of our capital for the next several years. We 'went public' through our merger with Amadeus Energy, Ltd. on January 2, 2013 to better position the Company to pursue its core strategy of growing its leasehold position (currently in excess of 57,000 net acres), production, cash flow and reserve base in one of the most active onshore basins in the U.S."

For the six months ended June 30, 2020, the Debtors’ average net daily production was 13,888 barrels of oil equivalents (“MBoepd”) and the Debtors’ total oil and natural gas revenues were $54.25mn, of which $41.99mn is attributable to crude oil sales, $7.90mn is attributable to natural gas sales, and $4.36mn is attributable to NGL sales.

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