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November 11, 2019 − MTE Holdings LLC has added four further affiliate debtors to its Chapter 11 cases and filed a declaration in support of the Chapter 11 filings [Docket No. 50] which casts light on the heated conflict betwen the Debtors and lenders led by Riverstone Credit Management LLC (“Riverstone”) whom the Debtors accuse of cutting off funding in breach of existing credit agreements and necessitating Chapter 11 filings. For its part, Riverstone has publicly accused the Debtors and its CEO Mark Siffin (who signed the declaration) of mismanagement and filed documents with the Court alleging more than 30 defaults (denied by the Debtors) under those credit agreements further to which the Debtors now owe $410.0mn (albeit $65.0mn less than the Debtors want and believe they are entitled to). We include the lengthy arguments of both parties below.
All of this is against a backdrop of an O&G operation that the Debtors insist is thriving, with a projected tripling of annualized EBITDA to $120.0mn and claims of an eye-popping "164 million barrels of oil equivalent of total estimated ultimate recovery," hence the $10-50.0bn of estimated assets noted in their Chapter 11 filing.
On October 22, 2019, MTE Holdings LLC (together with two affiliates added on October 23rd and four more on November 8th, “MTE Holdings” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12269. The Debtors, which conduct oil and gas exploration, drilling and development operations in the Permian Basin in Texas, are represented by Robert J. Dehney of Morris, Nichols, Arsht & Tunnell LLP. Further board-authorized engagements include Kasowitz Benson Torres LLP as general bankruptcy counsel.
The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets between $10.0bn and $50.0bn (presumably reflecting the Debtors estimated 164mn barrels of recoverable oil); and estimated liabilities between $100.0mn and $500.0mn.
Goals of the Chapter 11 Filings
In a declaration in support of the Chapter 11 filings (the “Siffin Declaration”) [Docket No. 50], Mark Siffin, the CEO of affiliate Debtor MDC Energy LLC, stated: "The Company commenced the Chapter 11 Cases to maximize its enterprise value for the benefit of its stakeholders. At present, the Company intends to refinance its existing debt and raise additional capital to continue its drilling and development plan."
The Debtors’ Pre-Petition Capital Structure
- Reserve Based Lending Credit Agreement: The Debtors (specifically MDC) are parties to a September 2018 reserve based lending agreement with Natixis, New York Branch as Administrative Agent and Issuing Bank (the “RBL Agreement”). Pursuant to the RBL Agreement, MDC could borrow funds from Natixis and the other lenders to the RBL Agreement (the “MDC Secured Lenders”) against its oil and gas reserves in an amount based, in part, on MDC’s “Proved Reserves” attributable to its oil and gas properties, together with, among other things, a projection of MDC’s “rate of production and future net income, taxes, operating expenses and capital expenditures.”
MDC’s initial borrowing under the RBL Agreement was $60 million, and it was permitted to borrow and the MDC Secured Lenders committed to provide additional amounts periodically, up to a maximum of $300 million, as MDC’s “Borrowing Base” was recalculated to account for its growth in its oil and gas assets. The Debtors note that “MDC significantly increased its Proved Reserves since September 2018; however, the RBL balance remained at $60 million.”
- Term Loan Credit Facility: The Debtors (specifically MTE Holdings LLC) are parties to a September 2018 Term Loan Credit Agreement with a group of lenders (“MTE Lenders” and collectively with the MDC Secured Lenders, the “Lenders”) for which Riverstone Credit Management LLC (“Riverstone”) acts as administrative agent The MTE Credit Facility provided for loan commitments totaling $475 million, but, the Debtors add “because the MTE Lenders refused to honor the final $65 million borrowing notice, the principal amount outstanding as of the Petition Date is $410 million.”
Events Leading to the Chapter 11 Filing
The Siffin Declaration details the events leading to the Debtors' Chapter 11 filing, specifically attributing the Debtors' need for Chapter 11 protection to the "failure to fund" and "material breach" of Riverstone and other Lenders; notwithstanding the funding obligation of those Lenders to do so under the credit arrangements discussed above. This alleged failure to fund occurs against the backdrop of a "precipitous" decline in oil and gas prices; a decline which impacted revenues and necessitated further borrowing; it also clearly made Lenders, who watched borrowing levels soar to $410.0mn, very nervous. In addition to claiming copious reserves (164 million barrels of oil equivalent), the Declaration goes to some lengths to detail the Debtors' recent success and a rapid tripling of annualized EBITDA to $120.0mn (see more beow)
The Siffin Declaration states: "In the months that followed the execution of the MTE Credit Facility and the RBL Agreement, the prices of oil and gas began to decline precipitously. Confronted with this sharp market reversal, it was critical for MDC to maintain and even increase its drilling operations to maintain the cash flow necessary to meet its projections and satisfy the covenants in the MTE Credit Facility and the RBL Agreement.
Thus, to maintain the necessary drilling program, MTE and MDC continued to borrow the funds to which they were entitled under the respective agreements. By mid-April 2019, MTE had drawn down all of but $65 million of the available funds under the MTE Credit Facility for a total amount drawn down of $410 million. These funds were used to finance MDC’s operations.
At this time, MDC has drawn on the initial $60,000,000 under the RBL Agreement, but the MDC Secured Lenders did not fund any further amounts thereunder.
On April 18, 2019, in accordance with the terms of the MTE Credit Facility, MTE sent a borrowing notice (the ‘April 18 Borrowing Notice’) to Riverstone calling for the MTE Lenders to fund the remaining $65 million that was committed and available.
While Riverstone (and the MTE Lenders) knew that these funds were to be used to provide operating capital for MDC’s drilling operations, most notably, to pay MDC’s trade creditors, Riverstone failed to provide the requested funds within ten days as required by the MTE Credit Facility or at any time thereafter. This material breach of the MTE Credit Facility directly led to a cascade of harm to MTE and MDC by causing a significant liquidity shortfall and precluding MDC from being able to fund its operations and make orderly payments on its accounts payable, which largely consisted of its trade creditors."
About the Debtors
MTE was formed in June 2014 to hold membership interests in MDC and MDC Texas Operator LLC ("MDC Operator") and their subsidiaries. MDC conducts oil and gas exploration, drilling and development operations in the Permian Basin in Texas. MDC Operator acts as operator of the properties owned by MDC and its subsidiaries pursuant to an operating agreement.
MDC currently produces, approximately, 20,000 barrels of oil equivalent per day, 11,500 net acres of controlled contiguous blocks, 490 horizontal well drilling locations, and 164 million barrels of oil equivalent of total estimated ultimate recovery.
The Company has no employees. Pursuant to management services agreements with MDC and MDC Operator, Maefield Development Corporation (“Manager”), a non-debtor affiliate of the Company, provides management and related services to the Company utilizing its own employees. This includes the services of 23 dedicated fulltime employees located at the offices of the Manager in Midland, Texas. The Company reimburses the Manager for the direct costs of providing these services without a mark-up. These employees are also eligible to participate in the healthcare plan provided by the Manager. Typical monthly payroll plus healthcare is approximately $305,000.
The Siffin Declaration adds: "In the past year, MDC significantly expanded its operations. Specifically, it has:
- successfully drilled and completed 44 permitted horizontal wells and developed associated surface facilities and infrastructure;
- approximately doubled its average net daily production;
- begun generating approximately $120 million in annualized EBITDA – a nearly threefold increase in one year;
- more than doubled its proven reserves of crude oil and natural gas; and
- developed a new platform for water sourcing and disposal to support MDC’s own operations and those of third-party producers.
As a result, MDC currently produces, approximately, 20,000 barrels of oil equivalent per day, 11,500 net acres of controlled contiguous blocks, 490 horizontal well drilling locations, and 164 million barrels of oil equivalent of total estimated ultimate recovery."
Background on Dispute with Riverstone
The Debtors' Argument
The Siffin Declaration provides: "By late August, instead of providing the Company with the requested waivers for certain technical alleged defaults as it previously represented it would provide, Riverstone provided MTE with a proposed amendment to the MTE Credit Facility that would have placed onerous and unreasonable terms on MTE to obtain the promised waiver of those purported defaults. Under that proposal, within a month, the Company would have to either raise $60 million in equity (a difficult, dilutive, and unnecessary task), break up and sell components of MDC, or merge it with another company. Riverstone also proposed to install its own consultant to provide MDC with ‘financial help’ – all while increasing the costs of borrowing.
MTE responded to the proposal in early September by explaining that it wanted to cooperate and work with the MTE Lenders in good faith to address the issues they raised, but that many of the terms and/or timeframes proposed were unworkable and unacceptable. On September 13, 2019 – nearly five months after the failure to provide the $65 million in funding in breach of the MTE Credit Facility – Riverstone purported to ‘formally give notice’ of five Events of Default under the MTE Credit Facility.
Months after wrongfully refusing to honor the April 18 Borrowing Notice, in late September, and days after the conclusion of the one-year availability period under the MTE Credit Facility, Riverstone notified MTE that the MTE Lenders no longer were obligated to honor any additional funding requests.
Thereafter, on September 29, 2019, MTE, through counsel, responded to Riverstone’s claims of Events of Default. MTE denied that any effective Event of Default occurred and once again demanded that the MTE Lenders honor the April 18 Borrowing Notice and provide MTE with the requested $65 million.
On October 7, 2019, after MTE explained that its purported Notice of Events of Default was not effective and therefore there was no Event of Default, Riverstone responded to MTE’s letter by issuing a new Notice of Event of Default with fourteen additional purported defaults referenced. None of these new purported defaults had ever been noticed or even raised previously, notwithstanding that most of them were several months old.
On October 21, 2019, Riverstone sent to the Company a ‘Notice of Exercise of Voting Rights of Pledged Securities.’ Based on the same alleged ‘Events of Default ‘ outlined in its October 7, 2019 letter, Riverstone claimed to have exercised its rights under the collateral agreement among the parties (the ‘Collateral Agreement) to usurp the Company’s voting rights with respect to MDC. Riverstone informed the Company that ‘[p]ursuant to Section 6.01 and Section 7.01 of the Collateral Agreement, ‘ the Company’s rights ‘to exercise all voting and membership rights with respect to the equity interests of MDC Energy . . . are no longer effective and have become vested in the Administrative Agent. ‘ Riverstone then informed the Company that the Pledged Securities (the Company’s membership interests) in MDC have been deemed registered in the name of Riverstone as the Administrative Agent, and that Riverstone, at the direction of the MTE Lenders, has exercised its voting rights under Section 6.01(b) of the Collateral Agreement. However, Riverstone never took action to foreclose on MTE’s membership interests in MDC Energy.
Nevertheless, Riverstone informed the Company that it had used its purported newly-acquired ‘voting rights’ to effectuate substantial changes to the management of MDC. First, Riverstone ‘voted ‘ on behalf of the MTE Lenders to appoint new, purportedly independent members to the MDC board, Dan Gillett and Steve Pully, each of whom is to be paid $10,000 per month. Riverstone also ‘voted’ on behalf of the MTE Lenders to impose a new ‘Chief Restructuring Officer,’ John Echols (‘Echols’), who also was given a seat on MDC’s board, and who Riverstone specifically ‘empowered ‘ to renegotiate the RBL Agreement with Natixis. In its effort to hijack MDC, Riverstone ‘elected ‘ to give Echols broad powers while stripping powers from other officers.
Riverstone also ‘voted ‘ to force MDC to enter into a contract (the ‘Opportune Agreement ‘) with Opportune LLP ( ‘Opportune ‘), an entity in which Echols is a partner. In what is tantamount to a takeover, the Opportune Agreement purports to grant Echols sweeping authority to carry out the sale of some or all of MDC’s assets.
Finally, on behalf of the MTE Lenders, Riverstone ‘voted ‘ to retain a ‘financial advisor, Evercore Group L.L.C. ( ‘Evercore ‘), on behalf of MDC. Specifically, Evercore was tasked with providing ‘financial advisory services in connection with (i) a potential corporate merger involving [MDC], or a possible partial or full divestiture, directly or indirectly, of all or a portion of [MDC’s] oil and gas reserves, acreage, water assets/dedications, and/or its midstream infrastructure assets in the Permian Basin, regardless of the form or structure thereof and (ii) its efforts to raise capital, from one or a limited number of investors or other financing sources, through the issuance by [MDC] or one of its affiliates, in a private placement, of equity (including equity-linked) and/or debt or debt-like securities, or through one or more loans or other financing arrangements, in each case in one or a series of transactions, regardless of the form or structure thereof. ‘
At the time of Riverstone’s attempted unlawful ‘takeover ‘ of MDC’s management, the Company and MDC were working diligently on obtaining a refinancing that would provide sufficient capital to fund MDC’s operations. Riverstone’s and the MTE Lenders’ wrongful actions have placed in jeopardy the Company’s and MDC’s ability to obtain that critical refinancing. The Company and MDC were also working diligently to comply with numerous information requests being made by Riverstone and the MTE Lenders on an almost daily basis.
The Debtors Commence the Chapter 11 Cases. 32.As a result of Riverstone and the MTE Lenders’ wrongful attempt to take control of MDC, on October 22, 2019, MTE filed a petition in the United States Bankruptcy Court for the District of Delaware for protection under Chapter 11 of the Bankruptcy Code. On October 23, 2019, Olam Resources I LLC and MTE Partners LLC filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On November 8, 2019, the remaining Debtors filed chapter 11 petitions."
In a motion requesting that the Court lift certain of the automatic stay provisions normally accorded Chapter 11 Debtors [Docket No 6.3] Riverstone states: "As of October 21, 2019, with respect to loans in existence for only a twelve-month time period, MTE has already caused more than thirty Events of Default, including:
- Allowing the existence of significant accounts payable to become more than 90 days overdue;
- Allowing the existence of mechanics liens to attach to MDC’s assets; Failing to pay the Agent its $150,000 Administrative Agent fee on the anniversary of the Closing Date in accordance with section 2.6(d) of the Credit Agreement;
- Breaching MDC’s required financial covenants under MDC’s September 17, 2018 credit agreement with Natixis, as issuing bank and administrative agent, and BMO Harris Bank as lender (the ‘RBL Credit Facility Agreement ‘) which breach jeopardizes the Lenders’ right to payment;
- Failing to maintain an asset coverage ratio (an agreed ratio of MTE’s assets to debts) of at least 1.00 to 1.00 for at least the quarter ended June 30, 2019, and presenting the Lenders with an associated miscalculated compliance certificate;
- Drilling wells without an APOD in place;
- Repeatedly failing to provide complete, accurate, and current financial information to the Lenders, including the failure to provide audited financial statements for the 2018 fiscal year;
- Failing to deliver notices of Defaults and Events of Defaults as required by Section 5.2(a) of the Credit Agreement;
- Concealing these numerous ongoing defaults under both the Credit Agreement and RBL Credit Facility Agreement from the Lenders, and falsely certifying on numerous occasions that MTE was in compliance with the Credit Agreement; and
- Asking for and obtaining $120 million by actively concealing then-existing events of default that the Credit Agreement required MTE to disclose. 15.Under Collateral Agreement Section 6.01(b), if an Event of Default has occurred and is continuing, the Agent may exercise ‘all voting, corporate, membership, partnership and other rights pertaining to ‘MTE’s sole membership interest in MDC.
After discovering some of the numerous Events of Default, and notwithstanding MTE’s efforts to conceal such defaults, the Agent and the Lenders attempted to negotiate with the Debtor, making three forbearance proposals during August and September. The Debtor failed to meaningfully respond to any of these proposals.
The Agent sent notices of default to MTE on September 13, 2019 and October 7, 2019, outlining each of the defaults described above.
Concerned about the financial health of MTE, the Agent exercised its right to inspect MTE’s books and records pursuant to Credit Agreement Section 5.7. MTE did not comply with the Agent’s inspection notice, permitting the Agent’s advisor access to MDC’s offices for only a single introductory meeting (and denying the Agent’s advisor access after that date), and failing to provide the fundamental information sought by the Agent. The limited information that MTE did provide revealed additional and continuing defaults."
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