Turnaround Tuesday: Troubled Oil Biz Red Mountain Enters Discussions with Lender After Default

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Struggling oil company Red Mountain Resources Inc. is in negotiations with its lender after defaulting on its credit facility, according to a filing with the U.S. Securities and Exchange Commission. The company's troubles overlap with those of many other energy companies, which have financially struggled for months because of the volatile price of crude oil.

Dallas-based Red Mountain owns oil and natural gas properties in the Permian Basin in West Texas and Southeast New Mexico, the Gulf Coast and in Kansas. The business conducts hydraulic fracking to produce oil.

Red Mountain's accountant, Hein & Associates LLP, raised substantial doubt about the business' ability to continue as a going concern, or without the threat of liquidation, because of losses, a $14.4 million working capital deficit, and the default, according to an SEC filing.

The company incurred a $43 million loss for the fiscal year ended June 30. Red Mountain did not meet all of the financial covenants on a $17.6 million loan from Independent Bank, which caused the default. That loan matures in February and the company is in discussions with lenders, according to a filing with the SEC.

Earlier in 2015, Red Mountain raised money when it sold rights to certain properties to raise $25 million. But the company has been hurt by the decline in oil prices, and expects continued troubles if prices remain low.

"Continued depressed oil prices or a further decrease in oil or natural gas prices will not only reduce revenues, but will also reduce the quantities of reserves that are commercially recoverable, make some wells uneconomical to drill or operate, reduce our ability to develop our properties, reduce our access to capital and may result in charges to earnings for impairment of the value of these assets," the company says in its annual SEC filing, filed Nov. 13.

Energy markets have caused some companies to file for bankruptcy, and others to refocus towards energy M&A. In November, investment bank Piper Jaffray (NYSE: PJC) agreed to buy energy investment bank Simmons & Co. International as a means to expand energy banking services. (Piper Jaffray won Mergers & Acquisitions M&A Mid-Market Investment Bank of the Year award for 2014 in part due to previous acquisitions the firm made).

Dealmakers polled by Mergers & Acquisitions also say they expect more energy M&A.

For the previous edition of Turnaround Tuesday, see Essex Rental to Delist from Nasdaq, Contemplates Sale. For more struggling companies, check out Mergers & Acquisitions' Distressed Company Watch List

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