(Bloomberg) — California Resources Corp. filed for bankruptcy with a plan to hand ownership to lenders, kicking off what could turn into the next wave of collapses among oil drillers and the businesses that depend on them.
Under a proposal the company negotiated with senior lenders as part of its bankruptcy planning, shareholders will be wiped out and investors holding the company’s $1.3 billion, 2017 loan will get 93% of a reorganized California Resources. Lower-ranking creditors will share 7% of the new company if they vote in favor of the proposal. The plan must be approved by U.S. Bankruptcy Judge David R Jones after lower-ranking creditors have a chance to object.
The company joins more than 200 oil explorers that have filed for court protection since 2015, and more may be coming in a matter of weeks. Denbury Resources Inc. and Noble Corp. missed their July debt payments, and Chaparral Energy Inc. asked lenders for more time, setting them on course for a possible default.
With oil prices hovering around $40 a barrel, the industry simply isn’t able to support debts taken on when prices were near peak levels. California’s biggest crude producer has been weighed down by massive borrowings since its spinoff from Occidental Petroleum Corp. in late 2014, right at the start of the previous downturn in the crude market.
Low levels of cash and stricter state drilling regulations added to the pressure on California Resources, despite a $320 million investment from Tom Barrack Jr.’s Colony Capital Inc. last year.
The company said it owed more than 50,000 creditors about $6.1 billion, according to a Chapter 11 petition filed in federal court in Houston. About $5 billion of those liabilities are funded debt that may be reduced as part of the reorganization.
The bankruptcy is designed to reduce debt and other obligations by more than $5 billion, the company said in a statement. The proposed restructuring agreement is backed by about 84% of term-loan lenders who hold debt issued in 2017, and 51% of the company’s 2016 lenders. The company’s joint venture partner, Ares Management also backs the proposal.
To pay for the restructuring and to keep operating during the bankruptcy, the company will borrow about $1 billion from a group of existing creditors, according to the statement. Part of the money will be used to refinance a 2014 revolving credit facility.
Many investors have shunned producers operating outside of the Permian Basin of West Texas and New Mexico, the most prolific U.S. oil patch. Even before the most recent price crash, American drillers were increasingly struggling to attract capital amid market volatility and growing doubts about their ability to generate returns for investors.
More roadblocks appeared this year as the Covid-19 pandemic prompted widespread lockdowns that decimated global demand, while Saudi Arabia and Russia battled for market share before finally reaching an agreement with other members of the OPEC+ group to cut production. While oil prices have recovered from the extreme lows seen in April, they remain at a level where many American producers are struggling to achieve free cash flow.
California Resources employs about 1,200 people and operates more than half the oil fields in California, company Chief Executive Officer Todd A. Stevens said in a court filing. Nearly half of the company’s oil and gas was sold to Phillips 66 Company and Valero Marketing & Supply Co. last year.
One of the company’s most important assets is the Elk Hills oil field, which was discovered in 1911 and figured prominently in Teapot Dome bribery scandal involving cabinet members of President Warren G. Harding in the 1920s. The field provides natural gas for a power plant that is a joint venture between California Resources and Ares Management LP. That venture is not in bankruptcy.
California Resources traced its bankruptcy to the debt imposed on it as part of the 2014 spinoff from Occidental. After two rounds of debt restructuring in 2015 and 2016 and regular bond repurchases afterward, the debt was reduced to about $5 billion from a high of $6.7 billion, Stevens said in court papers.
Low oil prices continued to weigh on the company, which started and then canceled a debt exchange earlier this year. The company decided to file bankruptcy to implement the restructuring plan that hands ownership to senior lenders and wipe out shareholders.
The company’s bankruptcy law firm will be Sullivan & Cromwell, assisted by Vinson & Elkins. Perella Weinberg Partners will act as investment banker, while Alvarez & Marsal North America will provide restructuring advice.
The case is California Resources Corporation, 20-33568, U.S. Bankruptcy Court, Southern District of Texas, Houston.
(Updates with restructuring plan details in second paragraph and other details throughout)
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