By Vince Sullivan

Law360 (June 16, 2020, 5:07 PM EDT) -- Colorado energy driller Extraction Oil and Gas received permission Tuesday from a Delaware judge to tap into a $125 million Chapter 11 loan as it pursues a restructuring in the aftermath of the COVID-19 outbreak and an ongoing global energy pricing war.

During a first-day hearing conducted via phone and videoconference, Extraction attorney Christopher J. Marcus of Kirkland & Ellis LLP told the court plunging demand for oil and gas and continuing downward pressure on energy commodity prices had strained the company's liquidity in recent months and forced it into bankruptcy.

Coming to court with more than $1.7 billion of secured debt, Marcus said the company is pursuing a significant debt restructuring and needs the financing made available by existing reserve-based loan providers to make it through the bankruptcy process.

"We need to significantly delever the balance sheet to provide the greatest flexibility to the company upon emergence so we can navigate a very volatile pricing environment," Marcus told the court.

On an interim basis, U.S. Bankruptcy Judge Christopher S. Sontchi approved Extraction to access $15 million of the $50 million new money portion of the debtor-in-possession package as well as $22.5 million of the $75 million roll-up of prepetition reserve-based loan debt.

The debtor is seeking to exchange up to $1.1 billion in secured note debt through its case and intends to file a Chapter 11 plan and disclosure statement within the next three weeks. Extraction has garnered the support of most of its reserve-based loan lenders and noteholders for the plan, which is embodied in a restructuring support agreement, and is working to gain the support of its preferred equity holders, Marcus said.

Noteholders will receive most of the equity in a reorganized Extraction, with reserve-based loan lenders getting 3% of the new shares. A new rights offering designed to provide operating capital for the debtor post-bankruptcy will be made available to existing lenders in exchange for another 15% of the new equity.

The plan also includes a parallel track through which the debtor may pursue a sale or merger through an all-equity transaction, Marcus said. The company hopes to emerge from Chapter 11 by the end of October.

Extraction filed for Chapter 11 protection June 14 with more than $1.7 billion in secured debt in the form of $1.1 billion in notes and $650 million under the reserve-based loan. The borrowing base under the reserve-based loan was reduced from $950 million in the weeks before the bankruptcy filing due to the continued depression in energy prices, according to initial court filings.

Extraction operates in the Wattenberg Field of the Denver-Julesburg Basin in Colorado, working 295,000 acres in the Rocky Mountain region. Through 2019, the company produced a daily average of more than 88,000 barrels of oil equivalent per day from 1,500 wells, the declaration said.

Other energy producers have fallen into bankruptcy in recent weeks, laying the blame for their woes at the feet of COVID-19 and a pricing war between Russia and the Organization of Petroleum Exporting Countries led by Saudi Arabia. Both entities have increased their oil production since March, further driving down already declining oil commodity prices.

Templar Energy hit Chapter 11 earlier this month with plans for an asset sale of its production assets, and a frack sand miner and distributor — Vista Proppants and Logistics LLC — said its customer base had vanished almost overnight due to the same macroeconomic factors facing the entire industry.

The debtor is represented by Marc R. Abrams, Richard W. Riley and Stephen B. Gerald of Whiteford Taylor & Preston LLC and Christopher Marcus, Allyson Smith and Ciara Foster of Kirkland & Ellis LLP.

The case is In re: Extraction Oil & Gas Inc. et al., case number 20-11548, in the U.S. Bankruptcy Court for the District of Delaware.

--Editing by Stephen Berg.

For a reprint of this article, please contact reprints@law360.com.