Lilis Energy Inc. (NASDAQ: LLEX) has chosen to join the crowd in the Permian Basin and forgo its pure play strategy in the Denver-Julesburg (D-J) Basin with a merger of two companies with a lot of debt on their plates.

After various related transactions, the deal is valued at about $35 million.

Lilis entered into a definitive agreement to merge with Brushy Resources Inc., a San Antonio-based company with primary operations in the Permian Basin in West Texas.

Denver-based Lilis will acquire about 3,500 core net acres in the Crittendon Field in the Southern Delaware Basin. The deal was announced at the end of 2015 and included a $1 million refundable deposit paid to Brushy.

The assets, located in Winkler County, Texas, include more than 500 potential drilling locations. Total net production is about 460 barrels of oil equivalent per day, of which about 47% is oil.

As part of the deal, the company also undertook a recapitalization plan that will strengthen its balance sheet and pay Brushy debt. The merger agreement calls for Lilis to raise at least $15 million, including its $1 million deposit, to repay money Brushy owes to the Independent Bank no later than Jan. 29, Security and Exchange Commission (SEC) documents said. Brushy owes about $13.55 million.

Brushy violated several covenants of its debt agreement in June and has had a forbearance agreement with the bank since November that required the company to either refinance or sale its oil and gas assets. The merger agreement also contains other payments Lilis has to make, such as $500,000 to venture capital firm SOSventures LLC, SEC documents said.

Brushy is also divesting assets in South Texas to its subordinated lender in exchange for the extinguishment of $20.5 million in subordinated debt, payment of $500,000 in cash, and the issuance of a $1 million subordinated note, a press release said.

At closing, Brushy's CEO Michael Pawelek and COO Edward Shaw are expected to join Lilis' board and team in senior management roles. Additionally, Brushy staff will become employees of Lilis.

Lilis, which currently holds about 16,000 net acres in the D-J, intends to aggressively pursue similar transactions during the current economic environment for oil and gas properties, the company said.

“We are excited to have identified the combination of attractive producing assets and acreage position in the prolific Permian Basin, and a seasoned technical, operating and management team in Brushy Resources," said Avi Mirman, CEO of Lilis, in a Dec. 30 statement.

The transaction is pivotal for Lilis, Mirman said. “We expect to continue to identify additional accretive bolt-on transactions in our core areas with a similar approach and philosophy to acquisitions,” he added.

The total consideration paid in the transaction is comprised of the issuance of Lilis shares of common stock representing about 50% of the post-closing, common stock outstanding and assuming and refinancing $13.55 million.

Lilis intends to refinance its existing senior debt and convert all of its existing subordinated debt and preferred stock into shares of common stock.

Lilis’ recapitalization plan includes:

  • Entering into an agreement with holders of $6.85 million in outstanding debentures to convert the debentures into common stock at a price of $0.50 per share upon closing of the transaction;
  • Propose at the special meeting of stockholders to offer holders of its existing series A preferred stock to convert into shares of common stock at a price of $0.50 per share; and
  • Entered into a forbearance agreement with Heartland Bank of Arkansas in order to support the merger and refinancing of its existing indebtedness with the bank.

The merger is subject to customary closing conditions, including stockholder approval and the refinancing of Brushy’s senior debt. Both Lilis and Brushy will require stockholder approval to accept the merger.

Lilis expects the merger to close early in the second quarter of 2016, the release said.

ROTH Capital Partners initiated the transaction and is financial adviser to Brushy Resources.

Permian Results

Brushy said Jan. 13 it has recently completed work on the Wolfe #3H well located in the Crittendon Field in Winkler County, which it initiated as a result of the merger agreement.

The Wolfe #3H well was drilled into the Brushy Canyon Formation via a re-entry of an existing vertical wellbore, with a 3,800-foot horizontal leg drilled in a west-east direction.

The well encountered 50 feet of pay and was completed with a nine stage frack with 3.4 million pounds of sand and 65,000 barrels (bbl) of water. The jet pump was installed and initial fluid production was 1,000 bbl/d.

Over the past several days the response has been in line with expectations with total fluid extraction increasing to 1,500 bbl/d and oil production increasing from 10 to 160 bbl/d.

Oil production is expected to increase until it reaches the levels typical of other Horizontal Brushy Canyon wells drilled in the area, according to the release.

The company has a further 12 vertical wellbores in its acreage position that it could re-enter and convert into horizontal producers.

Management expects costs savings from re-entering wells could range from between $1.5- to $3 million on a per well basis, the release said.

Contact the author, Emily Moser, at emoser@hartenergy.com.