Arena Energy files for bankruptcy protection

November 2020 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

November 2020 Issue

Arena Energy, one of the largest offshore oil & gas companies operating in the Gulf of Mexico, filed for Chapter 11 in August. According to its bankruptcy filing, Arena has more than $1bn of debt and $35m cash on hand. The company reported operating revenue of about $581m in 2019.

“The Debtors, like many of their industry peers, have experienced significant challenges over the past several years due to sustained downturns and volatility in commodities markets,” wrote J. Michael Vallejo, Arena’s chief financial officer, in a filed document. “Such challenges have been exacerbated in recent months by the unprecedented drop in global energy prices and market uncertainty due to the combined effects of the COVID-19 pandemic and the ‘price war’ between Saudi Arabia and Russia.”

Arena was founded in 1999 and controls about 341,000 acres in the Gulf of Mexico. It has estimated proved reserves of about 122 million barrels of oil & gas. The company’s average daily production was 37,000 barrels of oil and gas in 2019. Arena’s biggest unsecured creditors include the US Small Business Administration, which is owed $1.8m.

Arena’s filing comes less than a month after its reserve-based loan matured. It has not made interest payments on that debt since late March to preserve liquidity.

The company plans to sell virtually all of its assets to private equity firm Lime Rock Partners and a management group in a deal that includes $64.2m in cash. Arena enters bankruptcy with a restructuring agreement supported by 72 percent of its reserve-based facility lenders and 94 percent of term-loan lenders. The deal is subject to bankruptcy court approval.

Reserve-based lenders, owed nearly $630m, are expected to recoup between 10 and 20 cents on the dollar. Term lenders are expected to receive about 2 cents on the dollar of the $439m they are owed. The ‘cornerstone’ of the agreement is a deal to sell all Arena’s assets to San Juan Offshore LLC – an entity formed by Arena’s co-founder and chief executive Mike Minarovic, alongside an affiliate of private equity firm Lime Rock Partners. The assets will be sold as a ‘going concern’ to avoid potential abandonment costs, which could have reached about $530m, the filings said.

Arena is one of many energy companies to file for bankruptcy protection in recent months as both COVID-19 and energy price drops have taken their toll. London-based offshore drilling contractor Valaris Plc filed for Chapter 11 in August with $7.1bn in debt. Oil & gas company Chaparral Energy Inc. filed for the second time in five years in August.

Following Arena’s filing, North American bankruptcy filings for producers in 2020 stood at 36, 31 of which were in the second and third quarter. In terms of aggregate debt, the industry was near $53bn for 2020 as of late August. Offshore oil & gas producers, which require massive upfront capital and a decades-long return on investment, are among the companies most susceptible to the current historic low oil prices, which fell to a record -$38 per barrel.

Lime Rock is a buyout firm with a focus on oil & gas companies. It owns stakes in Prime Rock Resources, Augustus Energy Partners II and Crown Rock among its holdings.

Arena is owned by a small group of current or former employees and their family members.

Richard Summerfield