California Resources Corp (CRC) used Chapter 11 to shed USD 5bn in debt from its balance sheet.
The plan funds the oil and gas company’s assets with USD 200m in second lien exit financing and USD 450m raised through a rights offering. Key to the company’s uncontested confirmation hearing was a settlement with the unsecured creditors committee that gave unsecured creditors warrants for the company’s equity.
CRC’s problems predate the coronavirus pandemic, with the company’s 2014 spinoff from Occidental Petroleum Corp saddling it with USD 6bn in debt. But like many company’s in the oil and gas sector this year, the pandemic was the final blow, killing the company’s proposed exchange offer to cut USD 1bn in prepetition debt and leading to a bankruptcy restructuring.
Judge David Jones of the US Bankruptcy Court for the Southern District of Texas confirmed the plan at a 13 October hearing. The plan took effect on 27 October.
The oil and gas company owns approximately 10,700 productive oil wells and 1,086 productive gas wells operated by 1,224 employees in the San Joaquin, Los Angeles, Ventura and Sacramento basins, with the Elk Hills field in the San Joaquin as its largest producing asset. At the end of 2019, CRC had estimate reserves of 664 million barrels of oil equivalent with an estimated value of USD 6.8bn.
In 2019, CRC’s primary customers were Phillips 66 and Valero Marketing & Supply Company, which together comprised 46% of the company’s sales.
CRC was formed in 2014 through a spinoff from energy giant Occidental.
CRC entered Chapter 11 with USD 5.24bn in funded debt consisting of USD 883m owed on a revolver due 2021, USD 1.3bn on a first lien term loan due 2020, USD 1bn on a first lien, second-out term loan due 2021, and USD 1.81bn in 8% second lien notes due 2022.
On the unsecured side, CRC had USD 100m in 5.5% notes due 2021 and USD 144m in 6% notes due 2024.
The Occidental spinoff loaded CRC with approximately USD 6bn in funded debt amid depressed commodity prices, putting the company under significant pressure, CEO Todd Stevens said in his first-day declaration. The coronavirus pandemic and the Russia-Saudi Arabia price war further hurt prices and forced the company to reduce its rig count, the CEO reported.
CRC launched an exchange offer in February that would have swapped a portion of its second lien and unsecured notes for a mix of either equity and new term loans or royalty interests, a move that would have cut USD 1bn in debt. As the pandemic worsened in March, however, the company was forced to pull the offer.
The company skipped an interest payment due on its unsecured bonds on 1 June, Debtwire reported, kicking off a 30-day grace period. CRC was able to use that time to finish negotiations with its lenders on a restructuring support agreement (RSA) ultimately backed by 84.4% of the first lien term loan and 50.8% of the first lien second-out term loan.
The RSA included debtor-in-possession (DIP) financing to fund the case, with certain revolver and term loan lenders agreeing to provide a USD 483m in senior DIP and a USD 650m junior DIP, with the senior DIP rolling up USD 82.9m in prepetition debt.
The RSA set up a plan of reorganization that would have the lenders backing the agreement to provide USD 200m in second lien exit financing and backstop a USD 450m rights offering for CRC equity. The plan proposed to pay the revolver in full, while holders of the USD 1.3bn term loan would take 93% of CRC’s equity and 93% of the subscription rights under the rights offering.
Those term loan lenders’ deficiency claim and holders of second-out term loan debt would be lumped with second lien noteholders and unsecured noteholders, receiving 7% of CRC’s equity and subscription rights for 7% of the rights offering if the class voted in favor of the plan. Unsecured creditors would be unimpaired if that class voted in favor.
The RSA set up a series of milestones for the case, including a 27 November deadline to put the plan into effect. CRC filed its Chapter 11 petition in the Southern District of Texas on 15 July.
The company secured interim approval of the DIP package at its first day hearing on 17 July after an agreement between an ad hoc crossover lender group and the DIP lenders agreed that production sharing contracts (PSC), with an estimated value of USD 388m, would remain unencumbered during the interim period.
CRC amended its plan in August to provide new information, putting the enterprise value of the company at USD 2.5bn and the value of its equity at USD 1.87bn. The company continued to pick up support for the plan, with the ad hoc crossover group committing its support.
Late that month, the company reached a global settlement that brought in the unsecured creditors committee (UCC), giving unsecured creditors warrants 5% for of CRC’s equity in exchange for withdrawing their objection to the DIP. At that 25 August hearing announcing the settlement, the company picked up final DIP approval and conditional approval of the disclosure statement for the plan.
Judge Jones confirmed the plan at an uncontested hearing on 13 October. The plan took effect on 27 October.
The pandemic has been rough on the oil and gas industry, with oil prices going negative in April. Since 1 March, 54 companies involved in the oil and gas industry, including CRC, have filed for Chapter 11, according to Debtwire’s Restructuring Database. The Southern District of Texas remains the powerhouse district for oil and gas cases, with all but 15 of them filed in that court.
With more than 5bn in liabilities, CRC was one of the 10 largest of those cases filed since 1 March.
The case was In re: California Resources Corporation, number 20-33568, in the US Bankruptcy Court for the Southern District of Texas.
by Pat Holohan