HEX inks KLU deal

AIDEA backs Alaskan startup to acquire Cook Inlet natural gas project

Steve Sutherlin

Petroleum News

Anchorage-based HEX LLC said it has entered into a binding term sheet with the debtors and key creditors in the Chapter 11 bankruptcy of Furie Operating Alaska LLC, moving closer to its goal to acquire Furie’s Cook Inlet assets.

HEX President and CEO John Hendrix confirmed the deal in an appearance at an April 15 board meeting of the Alaska Industrial Development and Export Authority in Anchorage.

At the meeting, the AIDEA board unanimously approved a resolution allowing modifications to a previously approved AIDEA development-project finance loan to HEX not to exceed $7.5 million for the acquisition of the limited liability companies that own the natural gas leases and the natural gas production infrastructure of the Kitchen Lights unit.

The April 15 resolution allows a debtor in possession loan subordinated to the AIDEA loan, as agreed to in the debtor’s term sheet. The first source of repayment for the DIP loan is State of Alaska tax credits already earned but unpaid to date, subordinated to an ING tax credit debt in the tax credit waterfall, AIDEA said.

The addition of the subordinated debt obligation “does not, in our view, affect the material terms of our arrangement as a first priority lender to HEX LLC in the structure that we put in place, as we’re not requesting to have any change in those terms and conditions,” Alan Weitzner, AIDEA chief investment officer, told the board.

In the event that tax credits don’t satisfy the DIP loan by the fifth anniversary of the purchase date, a contingent liability lien on the assets of Furie will spring to an actual liability, subordinated to any AIDEA senior debt then outstanding in the order of claims, according to the memorandum to the board.

The subordinated loan is interest free for the first two years, then interest “accretes at 7% to the extent interest is not paid in cash from tax credits. Usual and customary loan terms will control the waterfall flow of funds in AIDEA’s favor and protect its security interest and repayment as the senior lender.”

Deal scheduled to close June 30

“We’re moving diligently to an effective date of June 30 for closure,” Hendrix told the AIDEA board.

“How we’re going to get there is, this week we will sign and file the acquisition agreement, the disclosure agreement, and the plan.”

Hendrix said that by May 4, HEX go in front of the bankruptcy judge - Judge Laurie Selber Silverstein in the U.S. Bankruptcy Court for the District of Delaware - where the judge will hear if any parties have complaints with what was filed.

“June 9 is the plan documentation hearing that we will be basically ratifying,” he said. “We can take possession by June 30 - basically a good date to basically just draw a line because there’s a lot of payments due - and take over.”

Hendrix said that the term sheet is an agreement with the debtors and creditors. The working interest owners have yet to sign off on the deal.

“The working interest owners, we’re still working that out; as you know right now they have an agreement that’s in place that we’re going to continue to work with them and get a resolution,” Hendrix said. “There’s another working interest party in place that’s 20%, which they basically forfeited to Furie years ago - so Furie, until they pay back the $800 million these creditors have spent, they don’t come back at 20%.”

“The working interest owners have no say in the bankruptcy court?” asked AIDEA Board Chair J. Dana Pruhs.

“No,” Hendrix said. “They could still come in and talk and the judge will rule on what they say. We’re hoping between now and then they come back and they agree to the agreements that were previously agreed.”

“So there’s already been one agreement with them?” Pruhs asked.

“More than one,” Hendrix said.

“It will be defined,” Weitzner said. “For it to come out of bankruptcy, they have the ability to object in the process, but the closing that we’re focusing on for June 30 would be in structuring our loan that enables John (Hendrix) to have the capital to acquire the company and one of the conditions is ultimately that this is being sold with those issues fully defined to John for his operation.”

“So, you sign off on the agreement with the working interest owners if there is one?” Pruhs said.

“That will be part of what we’re looking at,” Weitzner said. “We need it to be defined.”

“Or we could just do it here and say, ‘look, we understand that this is the agreement, and we’re going to work with the best resolution possible’ ... I mean they’re not going to get more than 20%, and then that way, they also have to - if we go to that - as a full working interest owner you have to pay your costs,” Hendrix said. “Under the current one that we looked at, they didn’t have to pay costs; now they have to pay costs if they revert ... which some people think is very valuable.”

When asked by Pruhs to identify the working interest owners for the record, Hendrix said he would have to refer to his files to name them all, but he said they were known as the RWIO group.

According to Feb. 18 court filings related to a now defunct acquisition by foreclosure agreement between the debtors and Kachemak Exploration as acquirer, the RWIO parties are Giza Holdings LLC; Taylor Minerals LLC; Allen Lawrence Berry; the 2007 Allen Lawrence Berry Trust; and Danny Davis. There was a related settlement agreement and mutual release filed, but the Kachemak transaction subsequently fell through.

State royalties, Alaskan jobs

“Yeah, there’s overrides ... they haven’t changed at all,” Hendrix said. “There’s 12 and a half percent the state has a royalty interest on, and 12% which a number of parties have interest in.”

“Does the state and those private parties have to sign off?” Pruhs asked.

“The state has to sign off,” Hendrix said.

“Any feedback from the state?” Pruhs asked.

“The initial conversations I’ve had is that they’re supporting seeing an Alaskan operator come in on that field,” Weitzner said.

Pruhs asked about out of state workers.

“We do have Peak, which is owned by Bristol Bay Native Corp. has a number of workers there under contract,” Hendrix said. “As I’ve stated, I want to have an Alaskan owned company. I have to be mindful of the transition when you take over a company, to bring people on board on HEX and our values, and the current players out there right now have done a superb job, managing it this past winter without freezing that flowline up.”

Pruhs asked if HEX will increase the number of jobs.

“We see a great opportunity to ... it’s called studying the rocks and getting back to base management,” Hendrix said. “If we look at the base of the assets that we have, the reserves, we can grow there.”

“If we study the rocks, we can grow and look at growing opportunities and provide more gas and possibly oil,” he said. “Right now this is a gas only play; there’s no condensate oil; it’s very clean; if there’s a rupture in the line there’s nothing that’s going to get in the environment or anything.”

“But the sad thing of it is that if HEX does not move forward, this could go into Chapter 7 and it would be mothballed, and it would be shut-in, and then whoever has to pick up the crumbs has to come up again at a greater cost,” Hendrix said. “Might get it for a cheaper price, but it’s going to be a greater cost to humans and Alaska’s economy and the project.”