Oil prices hit their highest level in more than seven years last week, but that hasn’t stopped a San Antonio oil and gas company from filing for bankruptcy protection.
Active resources, formed in 2003, filed a Chapter 11 bankruptcy petition on Thursday that listed assets and liabilities each between $10 million and $50 million. A related company, Tiva Resources, also filed a complaint. The skeletal petitions did not include detailed financial information.
Activa chairman John Hayes blamed 2020’s record low oil prices for creating major challenges that crippled the company last year. Crude oil prices, now around $90 a barrel, fell below zero for the first time in history in the spring of 2020.
Low prices, along with tightened credit standards, resulted in a significant reduction in the amount of money Texas Capital Bank would lend to Activa, Hayes said in a filing Friday in U.S. Bankruptcy Court in San Antonio.
On March 31 last year, Activa and the bank amended a credit agreement that required the company to enter into hedging contracts for the majority of its oil production. At the time, Hayes said, oil was trading at $50 a barrel, but many industry experts expected it to climb to $70 or more.
U.S. shale producers have generally been very active in hedging production to cover capital expenditures and debt repayments, Bloomberg reported last year. But there has been less of a need to use hedges to protect against downsides as cash flow has increased with rising oil prices.
Activa protested the bank’s requirement to enter hedges, but was unable to sway the lender, Hayes said.
Activa entered into hedges with Minneapolis-based commodity hedging firm Cargill at prices ranging from $58 a barrel in May to $54.35 to $56.17 a barrel in August.
Under the amended credit agreement, Activa was to make monthly principal reduction payments of $150,000 and interest payments of approximately $50,000 per month.
“Hedges with Cargill quickly turned negative,” Hayes said. “The coverage cost Activa over $70,000 in June 2021 and over $120,000 per month in October 2021 and January 2022.”
The combination of hedges, monthly principal reduction payments and interest payments exceeded Activa’s net cash flow, he said. Its management and board of directors determined in August that it was at risk of not paying its operating expenses. This could have resulted in liens being placed on Activa properties, which serve as collateral for a bank loan.
Activa continued to make its payments, but late last month the bank “swept Activa’s operating accounts and suspended the common interest account,” Hayes said. “This action has significantly limited the debtors’ ability to continue the normal course of business.”
At the same time, he said the companies had received bills from one of his operators that were more than $200,000 over budget.
The two events created a “liquidity crunch” for both companies, leading to bankruptcies to protect their business as a going concern, he added.
A partnership affiliated with CIC Partners, a Dallas-based investment firm, owns an approximately 82% stake in Activa. The balance is held by Activa Holdings Corp.
Activa has oil and gas assets in Texas, Louisiana and Arkansas that have “strong production and reserve profiles,” Hayes said. It has six employees.
Its principal asset is a working interest in the 16,400-acre OSR-Halliday unit in Leon and Madison counties in eastern Texas. It has the potential for more than 30 million barrels remaining from primary production to full development, he said.
As part of its reorganization, Activa is considering the sale of assets. It also intends to restructure and/or relieve all or part of the bank indebtedness of $10.2 million and to terminate the obligations under the hedging agreement.
The debtors asked the court to consolidate the bankruptcy files. A hearing on the application and other motions is scheduled for Wednesday before Judge Michael M. Parker.
pdanner@express-news.net
