The road to bankruptcy, a business writer observed, is paved with good deals.

And, it could be added, lots and lots of debt.

While the writer, Emma Johnson, was commenting on personal bankruptcies, Milagro Oil & Gas Inc.’s July 15 bankruptcy petition in federal court is a walk down that same path.

Milagro, based in Houston, filed for Chapter 11 bankruptcy July 15 to reorganize, though a deal was negotiated beforehand to sell Milagro’s assets to a private company, White Oak Resources VI LLC, for $217 million.

Milagro operates along the Gulf Coast of Texas, Louisiana and Mississippi and owns interests in about 4,690 oil and gas leases.

After a huge deal in 2007, the company has not seen positive net earnings in the seven years since.

Milagro, like many oil and gas companies, borrowed hundreds of millions of dollars to fund deals. The company took on huge natural gas stocks but was sapped when prices fell. Punishing debt and low commodity prices led to a decline from which it never recovered.

The company lost roughly $15 million in the first quarter of 2015, bankruptcy documents show.

After years of struggling with debt, Milagro’s woes were further “exacerbated by the declines in global crude oil and natural gas prices” in 2014, said Scott Winn, Milagro’s chief restructuring officer, in a sworn statement.

Many industry operators are feeling the same effects. Fitch Ratings said July 15 that its high yield energy sector default rate continued to climb with the recent Chapter 11 filings of E&P companies. The trailing 12-month (TTM) rate is more than one-half point higher at 2.6%, and the E&P subsector rate has risen to 5.1% from 3.7%, according to Fitch Ratings.

Much like Milagro, Sabine Oil & Gas Corp. rang up debt to fund drilling and acquisitions before payments became unsustainable amid souring market prices.

Sabine also filed for Chapter 11 bankruptcy on July 15.

Milagro lists its largest debt as its 2016 notes. It lists the amount of the claim as “unknown.” The company has a term loan that expires in September 2017 with an outstanding principal of $87.6 million.

White Oak has submitted a proposal to the court to purchase Milagro for $217 ($120 million in cash and $97 million in White Oak equity). The deal gives White Oak all assets, mineral fee interests, mineral rights, oil and gas wells, salt water disposal wells, injection wells and anything else Milagro owns.

Rags To Repo

In December 2007, Milagro closed a deal with Petrohawk Energy Corp. to acquire 1,000 wells producing about 104 million cubic feet of natural gas equivalent per day (MMcfe/d) for a whopping $825 million.

The company’s spread totaled more than 162,700 net acres.

Just two months before its 2007 deal, Milagro was a small, private $40 million company.

Their deal with Petrohawk expanded the company by a factor of 20. Milagro raised money from a consortium of lenders, including about $315 million from banks led by Wells Fargo. The company also drew about $260 million from its senior tranche.

Milagro gained more than 264 Bcfe with an additional 400 risked Bcfe of potential reserves identified on 162,700 net acres. Milagro also acquired the rights to an extensive library of more than 6,000 square miles of 3-D seismic.

Overall, the company had about 1,200 wells as of July 15.

Milagro’s blockbuster deal wowed the industry.

In 2007, the average wellhead price of natural gas was $6.25 per Mcf. In 2008, prices averaged nearly $8 but soon hit the skids.

Seven Years

In its bankruptcy filing, Milagro said its assets were about $390 million and its liabilities $468 million. For fiscal year 2014, the company generated revenues of $153 million.

Its troubles started just after the deal with Petrohawk closed.

In 2008, Milagro reduced its asset base and took an impairment charge of $430 million and another $40 million in 2009 due to declining prices.

In April 2011, Moody’s Investor’s Service gave the company a negative rating. Moody’s calculated that as of December 2010, the company’s preferred stock was 50% debt. Milagro had $18 million of cash and $70 million available under its $300 million senior secured first lien credit facility that was limited by other debt.

By December 2013, Milagro was in uncomfortable straits with credit agencies saying the company was likely to default on its debt. Moody’s said the company failed to make interest payments on its $250 million senior secured second lien notes due 2016. The ratings company went on to say that Milagro could be headed for bankruptcy under the right circumstances.

Standard & Poor’s Ratings Services also said that Milagro looked likely to default on its senior notes. Milagro had drawn a $133.5 million revolving credit facility that was also subject to a cross-default provision, meaning Milagro was in technical default.

Milagro also had failed to submit regulatory filings since November 2013. In June, Moody’s discontinued ratings for the company.

Since 2012, Milagro tried to make transactions that would help address their liquidity or gain additional funding, giving information or making presentations to 20 interested parties, Winn said.

The company was able to refinance its first lien obligations in September 2014. Milagro was able to access additional liquidity and believed that they may be on a path to improved financial performance.

“Immediately after the refinancing, the debtors were able to implement new drilling programs, which was simply not possible prior to the refinancing,” Winn said.

The initiatives were short-lived – 2014 commodity prices began their decline.

“The unforeseen and sharp dive in pricing in the global oil and gas markets that played out through the end of 2014 led to a contraction,” Winn said.

The company filed for bankruptcy in July with White Oak waiting in the wings.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.