In order to fund the operations of an oil and gas drilling and production operation, an insurance company and a private equity investor entered into a credit agreement providing $135 million in senior debt financing using a Volumetric Production Payment (VPP) as collateral. The company was comprised of three business units: exploration/production, oilfield services, and midstream gas gathering. The company’s operations were focused primarily on long-lived reserves in the San Juan Basin of Colorado and New Mexico. Elm Ridge controlled in excess of 285,000 gross acres (185,000 +net).
Since entering into this agreement, Elm Ridge’s financial performance had deteriorated. Liquidity had become constrained and Elm Ridge was in default of the VPP as the result of a lack of drilling the required wells, with the eventual breach of monthly payments. In order to achieve the lender’s objective of saving its investment, Getzler Henrich (“GH”) was engaged to assess the situation by reviewing detailed records of historical well-head production and related Lease Operating Expenses (LOE); conducting in-depth interviews of senior management and key employees; inspecting the production equipment, particularly gas meters, compression stations, and dehydration units; and reviewing completion dates for wells in various stages of development in order to determine if production was timely included in the VPP calculations. GH also tracked production volumes (oil, gas, non-gas liquids) from wellhead to point of sale from the date of closing to the current period and reconciled reported internal production volumes against volumes reported to regulatory agencies, tax authorities and revenue owners. In addition, our experienced oil field experts reviewed key contracts, gathering, transportation and processing agreements, and supplier relationships providing an assessment of whether the contracts were done in-line with current market pricing environment, contract and spending optimization.
Operational practices were assessed by reviewing schematics, identifying compressor pressures, quantity and efficiency of the producing wells. GH’s charge was to market test operations to best in class and expected yields; analyze the gas metering process; record master meter station ID’s to be able to tieback into volumes of gas being paid and make certain that gas was being accounted for either through an independent meter or allocated through a master meter.
GH evaluated run tickets on oil sales and tied them into sales being disbursed. GH also observed service companies working on the leases, workover rigs, roustabout crews, water haulers, and compression services in order to determine which services were being used and what companies were being paid and worked with accounting to make sure all volumes of oil and gas sales being disbursed match the actual production in the field.
It was apparent to the note holders that it would be necessary to sell the assets to recoup their investment. GH participated in the sale process by reviewing the data room materials and interviewing prospective bidders and by searching out additional prospects for the sale and/or operation of the property. The bids were received, and GH was involved in working the bids to obtain the amount needed to get the investors whole.