By Rose Krebs

Law360 (May 18, 2020, 11:32 AM EDT) -- Shale oil and gas company Gavilan Resources LLC hit Chapter 11 in Texas bankruptcy court with $552 million in secured debt and citing plummeting oil prices amid the COVID-19 pandemic and other market conditions as reasons for its trip into bankruptcy.

In a first-day declaration filed Saturday in the U.S. Bankruptcy Court for the Southern District of Texas, Gavilan CEO David E. Roberts Jr. said the company's Chapter 11 sale plan will also be impacted by an ongoing dispute with Sanchez Energy Corp. over who is rightful operator of certain assets, known as the Comanche assets, in the Eagle Ford shale in southern Texas.

Roberts said the "precipitous decline in oil prices from the combined effect of the COVID-19 pandemic and the flooding of oil markets by warring international producers forced Gavilan into these Chapter 11 proceedings."

Formed in 2017 by funds managed by Blackstone Energy Partners LP, the privately held Gavilan acquires and develops producing oil and natural gas assets in the Eagle Ford shale, the declaration said. Along with affiliates of Sanchez Energy, Gavilan purchased assets in the shale for roughly $2.3 billion from Anadarko Petroleum in 2017, Roberts said.

Gavilan owns about 77,000 net acres of oil and gas leasehold interests and paid Anadarko 50% of the purchase price to acquire 50% of the ownership stake in the assets, the declaration said.

Gavilan and the Sanchez affiliates are parties to various operating agreements, with Gavilan asserting in its declaration that Sanchez is wrongfully operating the assets per terms of those existing agreements.

"Gavilan enters these Chapter 11 proceedings with a plan to market its business and assets while continuing its pursuit of operatorship of the Comanche assets via the operatorship dispute," the declaration said.

Sanchez filed its own bankruptcy last year and its Chapter 11 plan was confirmed April 30, clearing the way for a trial over the operatorship dispute to continue later this month in front of a Texas arbitration judge, the declaration said.

"The right to operatorship of the Comanche assets is a valuable asset of the debtors' estates and Gavilan intends to vigorously pursue those rights as part of its own sales and restructuring efforts," Roberts said.

Gavilan's sale efforts will be impacted by the outcome of the dispute, the declaration said.

A final decision on the dispute "is essential to develop an accurate understanding and valuation of the debtors' assets for purposes of the sale process, and ultimately, the debtors' reorganization options," Roberts said.

"Irrespective of how the dispute is ultimately resolved, I believe that the overhang of the litigation on the debtors may dissuade bidders from bidding on the debtors' assets," he added.

Gavilan and three affiliates hit Chapter 11 late Friday with $102 million in senior secured debt administered by JPMorgan Chase Bank NA and $450 million owed on second-lien debt administered by Wilmington Trust NA.

During a hearing Monday, U.S. Bankruptcy Judge David R. Jones approved various "first day" motions, including for Gavilan to pay wages, utility costs, and use cash collateral to fund operations as it moves forwards with its Chapter 11, according to court records.

Gavilan is represented by Alfredo R. Pérez, Brenda Funk, Ray C. Schrock and Garrett A. Fail of Weil Gotshal & Manges LLP.

The case is In re: Gavilan Resources LLC, case number 1:20-bk-32656, in the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division.

--Editing by Marygrace Murphy.

Update: This story has been updated with additional information from the first-day declaration and from Monday's hearing.

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