Struggling energy company Escalera Resources Co. (Nasdaq: ESCR) has reached a forbearance deal under which it will sell assets to reduce debt, and lenders will not push the business into bankruptcy (at least through Sept. 1).
The Denver-based company explores, develops and transports natural gas in the U.S.
Some oil companies have struggled because of volatile crude prices which have fluctuated between more than $100 per barrel in September 2014 to a low of about $49 per barrel. Some dealmakers have expected more M&A as a result, and that struggling businesses will sell for lower valuations than would have been previously expected.
That crude price decline has negatively affected Escalera, which raised doubt about its ability to continue as a going concern, or without the threat of liquidation, in its annual report on April 15. “Escalera’s cash flow from operations has been negatively impacted by the decreases in natural gas commodity prices,” the business stated.
Escalera’s forbearance deal and loan amendment last through Sept. 1, according to a filing with the U.S. Securities and Exchange Commission. Under the terms of the deal, the company's borrowing base was reduced to $44 million from $50 million, which resulted in a borrowing base deficiency of $3.5 million. The company defaulted on the loan because it didn’t meet a covenant regarding its debt to Ebitdax ratio. The going concern warning from Escalera’s auditor also violates a covenant and put the company into default.
In exchange for the forbearance deal, which was announced on Aug. 3, Escalera has agreed to sell assets in order to pay off debt. In July, the business sold its Pinedale Anticline properties for $12 million and used the $10.5 million in proceeds for debt reduction.
But at the same time, the company is still trying to grow. It agreed to spend $47 million to buy wells and leasehold interests from Warren Resources Inc. (Nasdaq: WRES) in June. The company’s CEO said the acquisition would be immediately accretive to cash flows.
For the previous edition of Turnaround Tuesday, see Can Lawsuit-Laden American Apparel Skirt Bankruptcy? For a list of more struggling companies, check out Mergers & Acquisitions Distressed Company Watch List.