If a business in Texas chooses to consider filing for Chapter 11 bankruptcy, it does not necessarily follow the typical script of what is generally perceived a reason for the decision. In some instances, a business is faltering because of a lack of sales, mismanagement or other problems. With certain businesses, the market will dictate how successful or unsuccessful a business is. If it is a business that is highly dependent on factors out of the business owners' and managers' control, then it is possible that a business bankruptcy will be necessary for debt reorganization and to get into a better position for a possible future.
A producer of oil and gas in Texas filed for Chapter 11 bankruptcy as they attempt to move forward with a plan to cut the company's debt. This is due to a slump in the price of oil that has led to a depletion of the cash the company had. The plan involves a restructuring to convert the funded debt into equity. This will reduce its current debt of greater than $1 billion.
This company's Chapter 11 filing is the latest of oil and gas companies who have done so in 2015. The company's operations will be funded by as much as $200 million in financing during this process. Once the bankruptcy is completed, the funding will be converted to equity. The bankruptcy came about due to $1.5 million in debt and $1.1 billion in assets. This company had stopped using the fracking method to try and save money. The shares in the company have reduced by 40 percent and are currently traded at 2.5 cents each.
With any business, there is the chance that there will be a negative business climate resulting in debt that cannot be overcome without taking steps, like filing for Chapter 11 bankruptcy. This can help to get back into a better position for the future. Whether it is a large or small business, one that is in a potentially lucrative industry like oil and gas or something more modest, debt reorganization is frequently a requirement as part of doing business.
Source: CNBC, "Magnum Hunter latest oil producer to seek bankruptcy," Dec. 15, 2015