Troubled oil company Cardinal Energy Group Inc. has sold interests in gas properties to private equity-backed Keystone Energy for $1.57 million, as part of a long-term financing deal.
Dublin, Ohio-based Cardinal explores for, develops, exploits and produces oil and natural gas, which it sells to domestic purchasers in Texas.
As part of the deal, Cardinal will also receive a 5 percent interest in Keystone, a new company created by Maximilian Global, a New York private equity firm, according to the company's June 23 filing with the U.S. Securities and Exchange Commission. Cardinal has the option to buy up to 50 percent of Keystone. Financial West Group was Cardinal's financial adviser for the transaction.
Maximilian Global created Keystone to provide project financing to Cardinal through a joint venture. The firm started funding projects on June 16, and has committed $2.6 million to help develop two oil leases. Through Keystone, Maximilian says it will commit up to $25 million to Cardinal in the form of a revolving line of credit.
"We further agree with Cardinal's expansion strategy formulated to take advantage of new opportunities available as a result of the decline in the price of oil," says Robert Levy, who controls Maximilian Global. "Cardinal has avoided overleveraging itself and therefore is well-positioned to grow through additional economically viable asset acquisitions."
Levy is also associated with another company on Mergers & Acquisitions Distressed Company Watch List Daybreak Oil and Gas Inc. According to Daybreak's SEC filings, Maximilian Investors LLC, also controlled by Levy, provided the company with a loan.
Maximilian's involvement may also allow Cardinal to buy additional properties from companies that have distressed balance sheets, the company says. Volatile oil prices are affecting some businesses, which may drive M&A activity from dealmakers that focus on distress situations. For more, see Investors Flow Into Oil & Gas.
Cardinal's negative cash flows, working capital deficit and the projected cost of capital improvements to its oil and gas wells raise substantial doubt about its ability to continue as a going concern, or without the threat of liquidation, the company says in a May 15 quarterly filing with the SEC.
As of March 31, the company had $687,731 in assets and $6.9 million in liabilities, with a working capital deficit of about $6.2 million.
Cardinal anticipates that increased levels of oil production in Texas will allow it to fund its lease operating costs through 2015, but that the money needed to rework existing wells may result in short-term liquidity imbalances.
For the previous edition of Turnaround Tuesday, see Struggling Entrepreneur Network EFactor Plans for Deals. For more troubled companies, check out Mergers & Acquisitions Distressed Company Watch List.