Southland Royalty Company LLC – Files Chapter 11 Plan and Related Disclosure Statement (with Plan Attaching APA with Nemesis The Williams Companies), Aims for May 12th Confirmation Hearing

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February 16, 2021 – The Debtor filed a Chapter 11 Plan and a related Disclosure Statement [Docket Nos. 1313 and 1314, respectively]; and further filed a motion requesting Court approval of (i) the Disclosure Statement, (ii) proposed Plan solicitation and voting procedures and (iii) a proposed schedule culminating in a May 12, 2021 Plan confirmation hearing [Docket No. 1315].

On January 27, 2020, Southland Royalty Company LLC (“Southland” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10158. The Debtors’ lead petition noted between 10,000 and 25,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn.

The Plan attaches a February 9, 2021 asset purchase agreement (the "Williams APA" at Docket No. 1313.1) entered into with Wamsutter E&P, LLC, an affiliate of the Debtor's longtime nemesis: The Williams Companies ("Williams"). 

On November 13, 2020, the Court issued its ruling in a lengthy adversary proceeding between the Debtor and Williams, holding that "yes" the Debtor could reject the gathering agreement (the "L63 Agreement") with Williams that had (by virtue of rapidly accruing liability under its minimum volume commitments or “MVCs,”) forced the Debtor into bankruptcy in the first place. That ability to reject, however, was something of a pyrhhic victory as the Debtor still needed a midstream route for shifting its oil reserves in order to attract another buyer. The Debtor had hoped that the Court would compel Williams to provide an escape route for those reserves via a second (but unrejected) gathering agreement (the "L60 Agreement") between the parties. That did not happen, with Judge Owens declining to force Williams to gather oil pursuant to the L60 Agreement. The Debtor's Disclosure Statement provides the following summary of the Court's ruling and its impact on the sale process: "Williams cannot be compelled to gather volumes covered by the L63 Agreement pursuant to L60 Agreement….The Court’s rulings confirm the Debtor’s ability to reject the L63 Agreement and sell its Wamsutter assets free and clear of the L63 dedication. 

However, the Court’s ruling that Williams is not obligated to service all existing production under the L60 Agreement complicated the Debtor’s ability to sell the currently producing assets being serviced under the L63 Agreement. Given the lack of alternative midstream providers in the Wamsutter field, the complexity of the infrastructure necessary to bring the Debtor’s natural gas to market, and the economic terms of the existing L63 Agreement, any purchaser would still be required to negotiate a new agreement with Williams to operate the Debtor’s assets currently serviced by the L63…As a practical matter, without a new agreement with Williams, the existing L63 wells could not be operated, and the owner—whether Southland or a new buyer—could likely be forced to plug and abandon those wells."

Plan Overview 

The Disclosure Statement notes, “If Consummated, the Plan provides for the Debtor to sell substantially all of its assets to Wamsutter E&P, LLC (the ‘Purchaser’) in exchange for approximately $251.7 million in aggregate consideration, comprised of (a) a cash purchase price of approximately $148.0 million, subject to certain adjustments described in the Purchase Agreement, (b) assumption by the Purchaser of certain liabilities associated with plugging and abandonment with an estimated PV10 value of approximately $102.4 million, and (c) payment of any third party cure costs for those agreements the Purchaser elects to have assumed and assigned to it, anticipated to be approximately $1.3 million, all as set forth in the Purchase and Sale Agreement between the Debtor and the Purchaser and related documents (the ‘Purchase Agreement,’ and the transactions contemplated thereby, the ‘Sale Transaction’). Approximately $48 million of the cash purchase price will be applied to pay Cure Costs arising from the assumption of certain midstream agreements with affiliates of the Purchaser. The net cash proceeds of the Sale Transaction will be used to fund distributions under the Plan. The primary objective of the Plan is to maximize the value of recoveries to all Holders of Allowed Claims and to distribute all property of the Debtor’s Estate that is or becomes available for distribution, in accordance with the priorities established by the Bankruptcy Code and applicable law.

Generally speaking, the Plan provides for: 

  • consummation of the Sale Transaction
  • the full and final resolution of all pre- and post-petition funded debt obligations of the Debtor; 
  • estimation of the total potential amount of secured M&M Claims
  • full payment to Holders of Allowed General Administrative Claims, Priority Tax Claims, DIP Facility Claims, Professional Fee Claims, Other Priority Claims and Other Secured Claims
  • a payment to Holders of Prepetition RBL Secured Claims in Cash of the ‘Net Distributable Proceeds,’ which, as more fully defined and described in the Plan represents all Cash and other assets of the Debtor available at any time on or after the Effective Date, including Cash on hand and net proceeds from the Sale Transaction, other than amounts allocated under the Plan for certain other creditors or other purposes;
  • distribution to Holders of General Unsecured Claims of the GUC Guaranteed Distribution Amount, 16% of the Sage Grouse Lease Proceeds, and 100% of Proceeds of Retained Causes of Action;
  • implementation of the RBL Plan Settlement pursuant to which the Holders of Prepetition RBL Claims are agreeing to (a) waive certain claims resulting from the diminution in value of collateral, and (b) subordinate the Prepetition RBL Deficiency Claim to the GUC Guaranteed Distribution Amount and GUC Sage Grouse Proceeds in order to resolve and settle any and all challenges to the Prepetition RBL Claims and related liens, including those asserted in the Committee Lien Avoidance Complaint;
  • releases to the Debtor, the Restructuring Committee, the Purchaser, the Prepetition RBL Secured Parties; the DIP Lenders; the Prepetition Agent; the DIP Agent and the Related Parties of the foregoing;
  • a Liquidating Trust to hold and liquidate certain assets for the benefit of creditors; and
  • a Wind-Down Amount and designation of a Plan Administrator to: (a) wind down the Debtor’s business and affairs; (b) pay and reconcile Claims as provided in the Plan; and (c) administer the Plan and the Reorganized Debtor, including certain assets vesting in the Reorganized Debtor to be liquidated for the benefit of creditors, in an effective and efficient manner.”

Proposed Key Dates

  • Voting Record Date: March 19, 2021
  • Solicitation Deadline: March 29, 2021
  • Publication Deadline: April 12, 2021
  • Plan Supplement Filing Date: no later than 7 days prior to the Voting Deadline
  • Voting Deadline: April 26, 2021
  • Plan Objection Deadline: April 26, 2021
  • Plan Confirmation Hearing: May 12, 2021

The Court scheduled a hearing to consider the motion for March 23, 2021, with objections due by March 16, 2021.

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):

  • Class 1 (“Other Priority Claims”) is unimpaired and not entitled to vote on the Plan. The aggregate amount of claims is $0 and the estimated recovery is 100%.
  • Class 2 (“Other Secured Claims”) is unimpaired and not entitled to vote on the Plan. The aggregate amount of claims is $TBD and the estimated recovery is 100%.
  • Class 3 (“Prepetition RBL Secured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $485,302,623 and the estimated recovery is [●]%. Each Holder shall receive its Pro Rata share of (a) on or as soon as reasonably practicable after the Effective Date, the Net Distributable Proceeds, and (b) on each Distribution Date occurring after realization of any Sage Grouse Lease Proceeds, 84% of such Sage Grouse Lease Proceeds.
  • Class 4 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $77.0mn and the estimated recovery is [●]%. Each Holder shall receive its Pro Rata share of: (a) the GUC Guaranteed Distribution Amount (ie $1.0mn); (b) the GUC Sage Grouse Proceeds on each Distribution Date occurring after realization thereof, and (c) any Proceeds of Retained Causes of Action, on each Distribution Date occurring after realization thereof. Notwithstanding the foregoing, (a) the Holders of Prepetition RBL Deficiency Claims shall not receive any portion of the GUC Guaranteed Distribution Amount or GUC Sage Grouse Proceeds, and (b) the Prepetition RBL Deficiency Claim shall be deemed subordinated to the extent of any entitlement to the GUC Guaranteed Distribution Amount and the GUC Sage Grouse Proceeds, including, for the avoidance of doubt, any GUC Sage Grouse Proceeds that are considered Proceeds of Retained Causes of Action.
  • Class 5 (“Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.


“GUC Guaranteed Distribution Amount” means $1,000,000.

“Net Distributable Proceeds” means without duplication, all Cash and other assets of the Debtor available at any time on or after the Effective Date, including Cash on hand and proceeds from the Sale Transaction, other than the Escrow Security Amount (as defined in the Purchase Agreement) prior to such time as it may be released to the Reorganized Debtor, the Wind-Down Amount, M&M Claims Reserve, GUC Guaranteed Distribution Amount, GUC Sage Grouse Proceeds and Proceeds of Retained Causes of Action, net of payment of DIP Facility Claims, Allowed Other Secured Claims, Allowed General Administrative Claims, Cure Costs to the extent not Assumed Obligations, Allowed Priority Tax Claims, Allowed Other Priority Claims, Allowed Professional Fee Claims and Prepetition Agent Expenses. Net Distributable Proceeds shall include any remaining amount of the M&M Claims Reserve and the Wind-Down Amount following payment or disallowance of M&M Claims and wind down of the Liquidating Trust.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Declaration“), Frank A. Pometti, the Debtor’s Chief Restructuring Officer detailed the events leading to Southland’s Chapter 11 filing; culminating in the reduction of the Credit Facility borrowing base and the ensuing inability to make timely deficiency payments noted above. The Declaration states: “The sustained downturn in the oil and gas sector has created an extremely challenging environment for the Debtor’s business, depressing revenues generated by production activities, while at the same time reducing the value of proven reserves. As a result of these trends, the borrowing base on the Debtor’s senior secured revolving credit facility… was re-determined and reduced on December 23, 2019, causing an accelerated repayment schedule.

At its core, the distress in the industry is a function of commodity prices and the decades-long disruption caused by hydraulic fracturing and horizontal drilling. And while it is commonly understood that oil and gas prices have remained relatively low in comparison to prices before 2015, less appreciated is the recent decline in gas pricing.

Commodity pricing pressures have resulted in materially reduced cash flow, while simultaneously decreasing the value of the Debtor’s proven reserves. For the Debtor, the dip in NGL prices has been especially dire: realized NGL pricing for the San Juan and Wamsutter field has declined approximately 70% from the third quarter of 2018.”

In addition to issues relating to commodity prices, the Debtor has been caught out by minimum volume commitments (“MVC”) contained in gathering agreements and is involved in protracted litigation with BP over land leased by BP which has hamstrung the Debtors on several fronts. The MVC issues are particularly worrisome as the Debtors calculate that annual MVC deficiency payments under a pair of contracts with Wamsutter LLC (“Williams”) are anticipated to be approximately $28.0mn in 2020 with that doubling to $72.0mn by 2023. The Declaration notes “potential MVC deficiency payments due over the lifetime of the Williams Agreements could be as high as $895 million on an undiscounted basis.” Fair to say, that the Debtor will be looking to shed these obligations in bankruptcy.

About the Debtor

The Debtor is a privately-held independent upstream energy company focused on the acquisition, development and exploitation of oil, natural gas and natural gas liquid (‘NGL’) reserves in North America. Headquartered in Fort Worth, it conducts its business across four states, with the majority of operations in Wyoming and New Mexico. The Debtor owns a unique land position comprised of leasehold and mineral interests in approximately 745,000 net working interest acres across both the Wamsutter field (‘Wamsutter’) of the Greater Green River Basin in southwestern Wyoming and the San Juan Basin (‘San Juan’) in southwestern Colorado and northwestern New Mexico, including approximately 150,000 net working interest mineral acres in the Wamsutter field.

The Debtor has no employees and outsources all functions of asset management, pursuant to that certain Management Services Agreement, dated as of February 9, 2015, by and between Southland and MorningStar (as amended from time to time, the “MSA”).

Corporate Structure Chart


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