Saskatoon, Carlyle – On July 24 the three-year oil downturn claimed a victim in the drilling industry, taking down Vortex Drilling Ltd.
The company was placed into receivership by its lender, Affinity Credit Union 2013. The credit union was owed in excess of $8,350,000 and applied for the appointment of a receiver in Saskatoon Court of Queens Bench. The judgment by Justice Brian J. Sherman was handed down July 24. Court documents are available on the Deloitte Insolvency website.
Vortex, a three-rig drilling company created in November of 2010, had applied for protection under the Companies’ Creditors Arrangement Act in order to pursue a reorganization, but this was not granted.
The judgment stated that Affinity had accommodated financial difficulties faced by Vortex since early 2015, and had made various agreements to accept interest-only payments in return for various undertakings by Vortex. Affinity said Vortex stopped making even those payments in April 2017 and was in default. Affinity demanded full payment, and Vortex failed to make that.
Vortex had initially owed a total of $14.9 million on Aug. 12, 2013, paying out existing loans on its first two rigs and financing the construction of a third rig. Principal and interest payments came in at $325,257 per month. A default would result in a demand of payment of all sums. The credit union was granted any of Vortex’s property as security.
Court documents show the company had $240,473 owing to 45 different entities beyond the credit union, the highest values of which were $67,763 to a welding shop and $66,719 to Do-All Industries USA Ltd. The remaining debts listed were generally much smaller in nature.
The judgment noted, “With the collapse of oil prices and the resulting downturn in the oil industry Vortex was unable to make the monthly payments contemplated by the credit agreement and sought accommodations from Affinity. By a series of agreements Affinity provided principal repayment deferrals to Vortex, which resulted in Vortex paying only interest for most of the months of 2016. Vortex failed to fulfil its commitments to make balloon principal payments and to resume principal and interest payments by dates and in amounts contemplated by these accommodations or deferral agreements.
“As of January 2017 regular monthly principal and interest payments of $325,257 were again to resume but Vortex failed to make such payments. In March of 2017 Vortex informed Affinity that it could only afford to make monthly payments of $100,000 rather than the $325,257 per month then required by the credit agreement. Affinity prepared an amendment to the credit agreement which would have permitted such reduced payments on condition that Vortex approach its shareholders to obtain an injection of equity capital to finance its business operations and reduce the indebtedness owing to Affinity. Vortex did not sign that amending agreement, has not made the required monthly payments, nor remedied the defaults that have occurred under the Credit Agreement, as amended from time to time.”
At the day rates discussed later in the judgment (approximately $7,000 per day), Vortex would have had to have one rig drill roughly two full weeks per month just to make the $100,000 payment, never mind payroll or other operating expenses. At the full payment value of $325,257 per month, at a day rate of $7,000, Vortex would have required 46.5 operating days a month, year round, between its three rigs just to make its payments to the credit union. At the $16,000 per day rates when the loan was taken out, the company would have needed 20.3 operating days per month to cover that payment.
On May 1, Affinity demanded full payment be made in 30 days, and on June 6 filed court papers applying for appointment of a receiver. It was adjourned until June 23. Negotiations between Affinity and Vortex followed in the next few weeks. The court appointed an interim receiver on June 23 to “investigate, monitor and facilitate Vortex's continuing operation so as to give Vortex an opportunity to file opposition affidavits and make its CCAA application.”
Vortex told the court, “The economic climate in the Western Canadian oil industry is improving and it is expecting a substantial improvement in its cash flow. It says it expects to soon secure additional business and that it is actively pursuing promising refinancing opportunities. Thus it says it is appropriate that it be given an opportunity to pursue such refinancing or a compromise with its creditors so as to avoid the social and economic costs of liquidation. It says that the security that Affinity holds has a value significantly beyond the debt owed by it, and there will be no real prejudice to Affinity by granting an initial order and granting a stay.”
Affinity argued that it had already given Vortex lengthy and significant accommodation, and it had lost trust in Vortex, which, Affinity asserted, had “repeatedly failed to honour contractual commitments made to Affinity in return for the deferrals granted and that the evidence demonstrates that Vortex has not acted in good faith.”
The court noted Affinity had accepted deferral on nearly 2.5 years of payments totalling $4.5 million. Despite this, Affinity expressed to the court, “Vortex has been unable to generate cash flow that permitted it to cover its variable operating costs, much less make a contribution to fixed costs. The application made by Vortex does not contain even the germ of a reorganization plan that has any prospect of succeeding. It relies on purported, but unverified, refinancing possibilities. Vortex has had many months' opportunity to obtain refinancing and has not been able to do so.”
The court discounted an affidavit which suggested the oil industry is improving and Vortex was experiencing significant growth. Instead, Justice Scherman wrote, “I conclude it is wrong to say that Vortex is experiencing significant growth. Rather it is limping along drilling wells on a ‘one-off' basis as and when such contracts come available. This work is done at depressed prices that cover the variable costs of operation, if that, and the bulk of its capacity is unused.”
The justice did not accept Vortex’s assertion that its equipment was worth $17.3 million and dismissed the credibility of that appraisal. He also noted that the day rates for drilling rigs had, “declined from in excess of $16,000 per day to under $7,000 per day and that only one out of three of Vortex's rigs has been operating on any regular basis gives significant basis to be concerned about the reliability of such evidence.”
Similarly, he found that while one rig was working, a second rig had only spent one week drilling one well for one company for the 2017 season, and didn’t find evidence to support the company’s assertion it would find work for the third rig.
Justice Scherman found Vortex had operated in bad faith with Affinity, and brought up a questionable accounts payable scheme with Radius Credit Union which came to light from the investigations of the interim receiver.
Similarly, a 2016 payment of a financial settlement of $525,000 to the ousted, original founder of the company, Harvey Turcotte, was supposed to be funded from outside sources and not Vortex’s cash flow.
In his findings, Justice Scherman expressed Vortex had not contemplated making any debt repayments to Affinity from July 17 to Sept. 24, 2017, and would not have been able to make its July 7 payroll without the injection of funds by the interim receivers. He wrote, “The prospect of Vortex finding a lender to refinance it, at the level required to satisfy all of the indebtedness to Affinity and other creditors without significant equity injections by the shareholders, is remote or non-existent.”
Additionally, Vortex’s shareholders had demonstrated they were not prepared to invest more money into the company over the last 2.5 years, something the credit union had long desired. He dismissed the prospects of refinancing the company. Given the day rates for the last two years, the company was unviable at its current debt levels. Indeed, its revenue barely covered, or not even covered, carriable operating costs for the rigs, let alone fixed costs.
As to whether the rigs’ value is worth more than the debt, Justice Scherman wrote, “given the utilization rates and day rates available to Vortex, that the present value of these rigs is a matter of significant uncertainty.” Keeping the rigs going would continue to depreciate their value.
Justice Scherman dismissed Vortex’s application for relief under CCA and appointed Deloitte Restructuring Inc. as receiver, effective immediately. Deloitte is currently in a sales process for the assets.
