With capital markets tightening and oil still below $30 a barrel in spite of the deal announced between Qatar, Russia, Saudi Arabia and Venezuela today to freeze oil output at current levels, a growing number of increasingly distressed oil and gas companies are fully drawing the remaining availability of their outstanding revolving credit facilities – often in the hundreds of millions of dollars – to provide themselves with options in an impending financial restructuring.
“The companies are making these drawdowns now, everyone realizing that cash is king and possession is nine-tenths of the law, and it’s better to have cash in the bank in place and extend that runway than not,” says Becky Roof, a managing director at the global consulting firm AlixPartners.
This month alone Chaparral Energy, Midstates Petroleum and LINN Energy – three oil and gas companies with operations largely in the South Central U.S. – have drawn down the remaining amounts on their revolving credit facilities. Midstates and LINN have publicly traded equities at pennies, Midstates at $0.18 trading under the MPOY ticker having moved down to the OTC Pink Sheets recently, and LINN under the LINE ticker on the Nasdaq at $0.38 both as of 1:38 p.m. EST. In a situation that has already resulted in bankruptcy, offshore drilling company Paragon Shipping, which drew down the remaining balance on its revolver in September, filed for bankruptcy on Sunday without debtor-in-possession, or DIP, financing, which is usually required if a largely insolvent corporation is going to restructure in court.The rest of the article is available by clicking here.
“One reason to do it is to have free DIP financing,” says Damian Schaible, a partner in Davis Polk’s insolvency and restructuring group.
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