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Another Onshore E&P Files for Chapter 11 Protection

Gulf Coast independent Milagro Oil & Gas Inc. on Wednesday joined the line of energy operators seeking Chapter 11 bankruptcy protection, citing declining commodity prices and an unsuccessful drilling program.

The Houston-based producer's geographic focus has been the onshore Gulf Coast, primarily Texas, Louisiana and Mississippi. It also has properties in North Texas and Western Oklahoma. Through Milagro Exploration LLC, the company employs about 100 people. It owns stakes in about 1,200 wells and operates 80% of net output.

The producer primarily is backed with private equity funds from ACON Investments, Guggenheim Capital and West Coast Capital. At the end of March,  assets were worth an estimated $390 million, with liabilities booked at a value of $468 million.

Milagro plans to restructure by paying off about $88 million in debt and swapping/selling equity, in exchange for $250 million of existing debt and a rights offering. TPG Specialty Lending Inc. is leading the proposed refinancing. The agreement with TPG and major creditors calls for Milagro to swap its oil and gas assets to White Oak Resources VI LLC for $120 million in cash and $97 million in equity. White Oak also agreed to take over obligations for Milagro wells that aren't producing.

Milagro CEO Thomas Isler also controls White Oak and other energy entities. Once the restructuring is completed, Milagro's main assets would be White Oak holdings. According to the Department of Interior's Bureau of Ocean Energy management, White Oak Resources VI LLC in early July had one lease in the Gulf of Mexico covering 921.6 acres.

Milagro has been in financial straits for more than a year, well before the collapse in commodity prices. Moody's Investors Service Inc. in late December said it expected the company to file for bankruptcy in 2014 after it failed to make interest payments. "The private equity sponsors had been supportive of liquidity in the past through 2010, but have not been since, making it uncertain whether they would potentially provide support to avoid a bankruptcy filing," said Moody's in late 2013.

Now, the company is "hamstrung by the same commodities pricing issues that had plagued their ability to generate profits since 2008," according to the Chapter 11 filing with the U.S. Bankruptcy Court in Wilmington, DE. An $825 million acquisition in 2007 of the Gulf Coast division of the former Petrohawk Energy Corp. (now owned by BHP Billiton Ltd.) was completed "when oil and natural gas prices were at or near historic highs," said Chief Restructuring Officer Scott Winn in his affidavit.

Court papers indicated that "operating performance has been negatively affected by a combination of declining commodity prices and unsuccessful drilling programs, all of which have led to the inability of the debtors to service their debt obligations and meet their obligations..."

Earlier this week Houston's Sabine Oil & Gas Corp. filed for protection, adding to a growing list of operators that include Quicksilver Resources Inc., Saratoga Resources Inc. and Cal Dive International Inc. (see Shale DailyJuly 15March 18).

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