Extraction Oil & Gas lost control of its midstream subsidiary as it tumbled into Chapter 11 bankruptcy

By Greg Avery  – Senior Reporter, Denver Business Journal

Extraction Oil & Gas lost ownership of a midstream pipeline subsidiary worth hundreds of millions of dollars just before Extraction’s slide into bankruptcy.

And the Denver-based oil company may have to pay its former business tens of millions of dollars for infrastructure north of the Denver metro area, company bankruptcy and U.S. Securities and Exchange Commission filings show.

Investors made a series of maneuvers to wrestle away ownership of Elevation Midstream LLC this spring as oil markets collapsed amid the Covid-19 pandemic and banks cut Extraction Oil & Gas’ borrowing ability by 30%, leaving it with little liquidity.

The final move, made last month, left Extraction Oil & Gas to claim a $73 million accounting loss on its income statement and cut the value of assets on its balance sheet by $270.5 million.

What role, if any, the loss of Elevation Midstream played in Extraction’s difficulty restructuring outside of bankruptcy court isn’t clear.

As recently as March, rating agency Fitch listed a sale of Elevation as one way Extraction could raise capital. Instead, Extraction’s filings revealed the company lost ownership of Elevation Midstream in the midst of trying to restructure its debt and took losses.

Extraction declined to comment or provide further detail about what happened.

Brian Cain, company spokesman, referred Denver Business Journal to company filings about the matter.

In the company’s bankruptcy filings this month, Matt Owens, Extraction CEO and president, revealed that as the oil company struggled to manage looming debt payments with scant liquidity, Elevation Midstream was demanding money in lieu of Extraction completing infrastructure expansion for its Matador gathering facility by April.

“The additional gathering facilities had yet to be completed, leading Elevation to allege that [Extraction] is obligated to pay Elevation $46.8 million in purported damages,” Owens wrote in a bankruptcy court declaration.

The company’s SEC filings cite Extraction’s “abandonment” of construction on Elevation’s Matador central gathering facility as what triggered the payment demand.

Extraction formed Elevation Midstream in 2018 to handle gathering, transport and processing of the oil, natural gas liquids and water coming from the wells it was drilling in Broomfield, southwest Weld, Adams and Arapahoe counties.

Wall Street investment firms, led by Blackstone, had agreed to provide Extraction with as much as $500 million in financing for Elevation Midstream.

Last October, its Badger central gathering facility in Weld County began moving crude oil and other products coming from wells in the Broomfield area, a milestone Extraction celebrated in a press release. Elevation was slated to start service this spring from its similar Matador gathering facility several miles to the southeast in Adams County.

The loss of Elevation Midstream was obscured by Extraction Oil & Gas seeking Chapter 11 protection to reorganize in the face of $1.7 billion in debt.

Extraction skipped a $14 million interest payment on its debt May 14 as it tried to negotiate restructuring $1.1 billion in debt notes and $600.5 million of revolving bank credit. No restructuring agreement was finalized by the end of the grace period and Extraction filed for bankruptcy.

An unidentified third party bought $250 million worth of preferred stock in Elevation Midstream LLC in 2018 and 2019 and this spring expanded Elevations’ five-member management board to nine members, giving the investors the ability to appoint six board members to Extraction’s three.

With control of the board, the preferred stock owners on May 1 issued themselves 1.53 million shares of common stock in Elevation Midstream, diluting what had been Extraction Oil & Gas’ 100% ownership of the midstream company to less than .01%, according to footnotes to Extraction Oil & Gas filings.

Elevations Midstream became enough of a separate company that it’s not included as a subsidiary considered a debtor alongside Extraction in its bankruptcy case.

Extraction filed a lawsuit May 26 seeking a judge’s ruling on whether it owed Elevation money for infrastructure expansion, Owens said.

That lawsuit is pending.