Venoco files for Chapter 11 protection

May 2016 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Volatility in the commodities market has forced many businesses into bankruptcy over the last two years. To date, 51 North American oil & gas producers have filed for bankruptcy protection since 2015, according to data from law firm Haynes and Boone. In March, Venoco Inc became the latest but will by no means be the last; Fitch Ratings predicts there will $70bn worth of energy, metal and mining defaults this year.

Denver, Colorado based Venoco filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware in the hope of removing $1bn worth of debt from its books. “Today’s announcement represents another significant step in our ongoing efforts to address the challenges before us and position the company for long-term success,” said Mark DePuy, Venoco’s chief executive. “After carefully evaluating our options, we have determined that the agreement to restructure our balance sheet and reduce our debt represents the best way to strengthen our finances and position ourselves for the future.”

Venoco said in its bankruptcy filing that the company’s restructuring support agreement and its debt-to-equity provisions would allow it to remain in business and exit bankruptcy and potentially allow recoveries for junior creditors that would otherwise be out of the money. The company’s restructuring plan has the approval of some of its lenders. In its bankruptcy filing, Venoco listed assets worth $100m to $500m and liabilities of $500m to $1bn. The firm says it has sufficient liquidity to continue its normal oil & gas activities and meet ongoing financial and regulatory obligations. Upon approval by the Bankruptcy Court, existing liquidity and generated cash from ongoing operations will be used to support the firm during the restructuring process.

Restructuring has been on Venoco’s agenda for some time. The company began exploring its options in 2014 as oil prices began to fall. Venoco is just one of a number of oil & gas firms to struggle to cut costs, capital expenditure and manage cash supplies under a sizable debt load. The price of crude oil has fallen 70 percent since 2014, and while this has been enough to push some firms under, Venoco has also had to contend with a third-party pipeline break and oil spill in May near Santa Barbara that fouled beaches and cut off nearly 50 percent of the company’s annual production.

The company missed a semi-annual $13.7m interest payment in February, claiming this was designed to give the company more time to figure out the best way to reduce its debt and strengthen its financial position.

“Having extensively explored other alternatives, the debtors carefully determined that the transactions negotiated under the [restructuring agreement] represent the best alternative for the debtors to deleverage their balance sheets and emerge from Chapter 11 with a new capital structure and appropriate leverage, to the benefit of all stakeholders,” said Venoco’s chief financial officer and chief restructuring officer, Scott Pinsonnault, in court papers.

The company’s Chapter 11 proposal includes a $35m debtor-in-possession loan through funds managed by Apollo Capital Management L.P. or its affiliates. Pre-bankruptcy equity in the firm will be cancelled under the plan, though some subsidiary company equity will be reinstated. The company’s debt includes $175m in 12 percent first-lien senior secured notes due in 2019, $164.1m in second-lien secured notes, $308.2m in 8.875 percent senior notes and $303m outstanding under another set it refers to as its senior PIK toggle notes. Venoco founder Tim Marquez is to remain executive chairman during the restructuring. The company’s senior lenders have retained him to provide leadership and strategic counsel to the company after it emerges from restructuring.

Richard Summerfield