North American Petroleum Corp (“North American”) filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware on May 26, 2010. According to North American’s Declaration in Support of First Day Motions (the “Declaration“), the company describes itself as an “exploration and production company which predominantly engages in unconventional well drilling operations for natural gas extraction” throughout Oklahoma. The majority of the company’s operations arise under a “Farmout Agreement” with Enterra Energy Corp. Under the agreement, North American provides drilling services to Enterra and in return receives a 70% interest in Enterra’s natural gas reserves. See Declaration at *3.
Events Leading to Bankruptcy
Working under the Farmout Agreement, North American and Enterra have developed more than 60 wells in Oklahoma. In addition to the Farmout Agreement, North American and Enterra work under a Cost Recovery Agreement whereby Enterra agrees to provide funding for waste-water disposal and other well-related infrastructure needed by North American. Enterra recently claimed that North American owed $15 million under the Cost Recovery Agreement. Enterra also claimed that North American failed to meet certain drilling deadlines, causing Enterra to send a notice of termination of the Farmout Agreement. North American’s problems worsened when Enterra filed mechanic’s liens against the company and then notified North American’s customers of the liens ($9.2 million total). Worse still, Enterra instructed North American’s customers to withhold funds pending the dispute. See Declaration at *4-5.
According to North American’s Declaration, the disputes between it and Enterra were eventually resolved. Even so, Enterra’s communications to North American’s customers led to customers holding back approximately $7 million in funds. The lack of liquidity arising from the dispute left North American with no other option other than to file for bankruptcy. Id.
Objectives in Bankruptcy
North American heads in to bankruptcy with two primary objectives: (i) restore the flow of cash through its accounts receivable; and (ii) restructure its debt with as little disruption to the company’s business as possible. The company’s prepetition debt totals $103 million through Texas Capital Bank and Compass Bank. In order to workout a restructuring through bankruptcy, North American reached a forbearance agreement with its lenders prior to bankruptcy. The lenders also agreed to provide North American with postpetition financing while it seeks a buyer or reorganizes. See Declaration at * 12.
This bankruptcy proceeding is before the Honorable Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware. A copy of North American’s Declaration in support of its bankruptcy filing is available here. A copy of the company’s Petition for Bankruptcy is available here.