Global Geophysical filed for Chapter 11 Bankruptcy on March 26, 2014 in the United States Bankruptcy Court for the Southern District of Texas (Corpus Christi Division) under jointly administered lead case No. 14-20130.
Sean M. Gore, is the Chief Financial Officer and a Senior Vice President of Global Geophysical Services, Inc. (“GGS,” together with the other debtors in the cases, the “Debtors”).
“The Debtors in these chapter 11 cases are: Autoseis, Inc. (5224); Global Geophysical Services, Inc. (4281); Global Geophysical EAME, Inc. (2130); GGS International Holdings, Inc. (2420); Accrete Monitoring, Inc. (2256); and Autoseis Development Company (9066).
Overview of the Debtors and their Business
“Global Geophysical Services, Inc. (“GGS”) and the other Debtors in these cases provide an integrated suite of seismic-data solutions to the global oil and gas industry consisting primarily of seismic-data acquisition, micro-seismic monitoring, processing, and interpretation services and the sale of seismic recording equipment to third parties. Through these services, the Debtors deliver data that enables the creation of high-resolution images of the earth’s subsurface and reveals complex structural and stratigraphic details. These images are used primarily by oil and gas companies to identify geologic structures favorable to the accumulation of hydrocarbons, to reduce risk associated with oil and gas exploration, to optimize well-completion techniques, and to monitor changes in hydrocarbon reservoirs. The Debtors integrate seismic survey design, data acquisition, processing and interpretation to deliver enhanced services to their clients. In addition, the Debtors own and market, directly or through third parties, a seismic-data library and license that data to clients on a non-exclusive basis.
“As further described below, the Debtors generate revenues primarily by providing two types of services to their clients, proprietary services and multi-client services. Proprietary services (“Proprietary Services”) consist of conducting geophysical surveys for clients on a contractual basis where the clients generally acquire all rights to the seismic data obtained through such surveys. Multi-client services (“Multi-client Services”) include selling licenses, on a non-exclusive basis, to seismic data the Debtors own as a part of their collection of seismic data, generally referred to as “seismic-data library” or “multi-client library.” The Debtors also generate revenues by providing microseismic monitoring, data processing, and interpretation services and through the sale of seismic-recording equipment to third parties.
“Many of the world’s largest and most technically advanced oil and gas exploration and production companies use the Debtors’ services. This includes national oil companies, major integrated oil companies, and large independent oil and gas companies. The Debtors and their foreign non-debtor subsidiaries provide seismic-data acquisition services throughout the world, including in some of its most challenging political and natural environments, such as marshes, forests, jungles, arctic climates, mountains, and deserts.
“The Debtors also have significant operational experience in most of the major U.S. shale and tight reservoir plays, including Eagle Ford, Bakken, the Haynesville, Permian, Utica, Fayetteville, and Woodford, where Debtors believe their high resolution RG-3D Reservoir GradeSM (“RG3D”) seismic solutions are particularly well-suited. As of December 31, 2013, the
“Debtors owned approximately 135,000 recording channels that were primarily comprised of their new AUTOSEIS® High Definition Recorder Systems. The Debtors’ recording channels and systems are interoperable, which provides operational scalability and efficiency enabling the Debtors to execute on large and technologically complex projects.
“Indeed, the Debtors and their foreign subsidiaries operate on a truly global scale with crews currently operating in Alaska, Colombia, Brazil, Iraq (Kurdistan), and Kenya. The Debtors’ crews work in some of the world’s most challenging environments, and their experience includes projects in the Continental U.S., and internationally in Algeria, Argentina, Canada, Chile, the Republic of Georgia, India, Mexico, Oman, Peru, Poland, and Uganda. As further described below, the Debtors’ recent and projected growth is overwhelmingly international in its focus, principally through foreign branch offices of GGS and foreign non- debtor affiliates.
“The Debtors have long-standing client relationships with a number of blue chip oil and gas companies, including many national and major integrated oil companies. The Debtors’ technology platform and global operating ability leverage these relationships throughout the world. The Debtors’ management has the knowledge base, experience, and relationships that underlie the Debtors’ strong operational reputation in the seismic industry.
“The Debtors provide seismic-data acquisition, microseismic monitoring, data processing, and interpretation services on a proprietary basis where their clients ultimately own the output of the Debtors’ efforts. For proprietary seismic-data acquisition services, clients typically request a bid for a seismic survey based on their own survey design specifications. In some cases, the Debtors are shown a prospect area and asked to propose and bid on a survey of the Debtors’ own design. In other cases, the Debtors may be able to propose modifications in the process or scope of a proposed project in ways intended to create value for the Debtors’ customers, in which case the Debtors are able to propose and bid on an alternative survey design. Once the scope of the work is defined, either the Debtors or the client will undertake to obtain the required surface and mineral access consents and permits. Once the required consents and permits are obtained, the Debtors survey the prospect area to determine where the energy sources and receivers that are required to acquire the seismic data will be located based on the chosen design. The Debtors’ crews then place geophones and energy sources into position, initiate the energy sources, collect the data generated, and deliver the data sets to the client. Where possible, the Debtors seek to combine seismic-data acquisition with processing and interpretation services. Throughout the entire process, the Debtors coordinate with clients in an effort to add value at each stage of data acquisition, processing, and interpretation. This integrated approach allows the Debtors to sell multiple bundled services, offer clients greater value, and advance toward obtaining the highest available margins.
“The Debtors also offer data-acquisition services in a multi-client structure. These Multi-client Services projects differ from Proprietary Services projects in that the Debtors set the specifications of the program (with some input from clients), generally handle all aspects of the acquisition from permitting to data processing, and maintain ownership of the seismic data and associated rights after the project is completed, including any future revenue stream. Clients also participate in the Multi-client Surveys by underwriting all or a portion of the costs of acquiring the data, which we refer to as pre-commitments. In return for their underwriting participation in a Multi-client Services project, customers receive a non-exclusive license to a designated portion of the underlying seismic data acquired by the Debtors at a favorable price on a per-square-mile basis.
“The Debtors include the seismic data sets acquired through multi-client surveys in their multi-client library, which is then available for licensing to other clients on a non-exclusive basis for a fee (referred to as a “Late Sale”). The seismic data licenses are typically transferable only under limited circumstances and only upon payment to the Debtors of a specified transfer fee. Substantially all costs directly incurred in acquiring, processing and otherwise completing seismic surveys are capitalized into the multi-client surveys and then amortized based on estimated future revenues (both from pre-commitments and Late Sales).
“In addition to acquiring seismic data through multi-client seismic surveys, in certain cases the Debtors will grant a non-exclusive license to a specific multi-client data set in the seismic-data library to a client in exchange for ownership of complementary proprietary seismic data owned by that client. The seismic data acquired from the client by Debtor under such an arrangement will then be added to the Debtors’ seismic-data library.
Overview of Capital Structure
Senior Secured Term Loan Facility
“GGS is party to a secured Financing Agreement, dated as of September 30, 2013 (as amended, the “Financing Agreement”), with TPG Specialty Lending, Inc. and Tennenbaum Capital Partners, LLC (collectively, the “Pre-petition Secured Lenders”). TPG is the administrative and collateral agent. The Financing Agreement provides for a senior secured first-lien term loan in the initial principal amount of $82.8 million. As of the Petition Date, approximately $81.765 million of indebtedness was outstanding under the Financing Agreement.
“The debt under the Financing Agreement is guaranteed by each of the Debtors and secured by substantially all real and personal property of the Debtors pursuant to various collateral documents, including a Pledge and Security Agreement dated as of September 30, 2013. The debt under the Financing Agreement is not guaranteed by any of the foreign non- debtor subsidiaries.
10.5% Senior Unsecured Notes due 2017
“As of the Petition Date, GGS had approximately $250 million aggregate principal amount in publicly traded unsecured bond debt, consisting of the following two issuances: $200 million aggregate principal amount outstanding of 10.5% Senior Notes due 2017 issued pursuant to an indenture dated as of April 27, 2010; and (ii) $50 million aggregate principal amount outstanding of 10.5% Senior Notes due 2017 issued pursuant to an indenture dated as of March 28, 2012 (such notes, collectively, the “Notes,” and such indentures, as supplemented to the Petition Date, collectively, the “Indentures”). The Bank of New York Mellon Trust Company, N.A., serves as the trustee under both Indentures.
“The Notes are the general unsecured, senior obligations of GGS and are jointly and severally guaranteed by each of the other Debtors on a senior unsecured basis. The Notes mature on May 1, 2017, with interest payable semi-annually on May 1 and November 1 of each year.
Other Material Indebtedness
“In addition to the loans under the Financing Agreement and the Notes under the Indentures, the Debtors have other material indebtedness, including:
- Unsecured Bank Notes in Colombia: GGS has issued six unsecured short-term promissory notes to Bancolombia and HelmBank—both based in Colombia—to finance equipment purchases and working capital needs for foreign operations in Colombia. The notes are summarized in the chart below:
|Bank||Origination Date||Maturity Date||Amount (approximate U.S. dollars)|
- LC Facility: GGS is party to a Letter of Credit Agreement, dated February 5, 2007 with Amegy Bank N.A. (as amended, the “LC Facility”) for revolving commitments in an aggregate principal amount of up to $10.0 million. The facility is cash collateralized by amounts in accounts maintained with Amegy Bank. As of March 25, 2014, Amegy had issued $947,000 of letters of credit under the LC Facility, all of which remain undrawn as of the Petition Date. The current cash balance in the collateralized accounts was approximately $985,000 as of the Petition Date.
- Insurance Financing: GGS is party to (i) a Premium Finance Agreement with Talbot Premium Financing, LLC, dated May 20, 2013 and (ii) a Commercial Insurance Premium Finance and Security Agreement, dated as of April 8, 2013, with BankDirect Capital Finance, a division of Texas Capital Bank, N.A. As of the Petition Date, the outstanding amount financed under these two agreements is $0.
- Capital Leases: From time to time, certain of the Debtors enter into capital leases to acquire seismic equipment, computers, and vehicles (“Capital Leases”). The balance outstanding under these Capital Leases as of the Petition Date was approximately $4.4 million.
Series A Preferred Stock
“In December 2013, GGS received net proceeds of approximately $7.1 million through the issuance of 347,827 depositary shares (the “Depositary Shares”), each representing a 1/1000th interest in a share of GGS’s 11.5% Series A Cumulative Preferred stock (the “Series A Preferred Stock”). Holders of the Series A Preferred Stock are entitled to cumulative dividends (whether or not declared) at the rate of 11.5% per year of the $25,000 liquidation preference per preferred share, and the dividends are payable monthly in arrears when, as and if declared by the GGS’s board of directors. Holders of the Series A Preferred Stock generally have no voting rights, but have the right to elect two additional directors to the GGS board if GGS fails to pay dividends in full for any monthly dividend period within a quarterly period (for a total of six or more quarterly periods) or fails to maintain a listing of the Depositary Shares on a national exchange for 180 consecutive days.
“GGS is a public company whose common stock and Depositary Shares representing the Series A Preferred Stock are traded on the New York Stock Exchange. As of March 1, 2014, there were approximately 38.12 million shares of common stock outstanding, with a total market capitalization of approximately $50 million. Recent events have significantly depressed GGS’ market capitalization.
Organizational Chart “Only the U.S. entities are debtors; none of the foreign subsidiaries currently are debtors in any proceeding. GGS operates a significant portion of its international business through foreign branch offices of GGS, as opposed to separate foreign subsidiaries. As a result, a significant portion of the Debtors’ operations, employees, and assets are located in foreign jurisdictions.
Events Leading to Bankruptcy
The Debtors Begin a Successful Turnaround in 2013
“The year ending December 31, 2013 was the Debtors’ best financial performance (in terms of Cash EBITDA which is defined as earnings before interest, taxes, and depreciation and further reduced for cash investment in multi-client library and increased for other non-cash charges) since 2009. As further described below, this improvement is the result of an increased focus on Proprietary Services with improved margins and an increase in pre-commitments for acquiring multi-client seismic data, and many of the operational improvements are expected to continue through 2014.
“During the years ended December 31, 2010, 2011, 2012, and 2013, the Debtors invested approximately $201 million, $199 million, $180 million, and $71 million in their multi- client library, all or substantially all of which is located in the Continental U.S. The aggregate book value for the Debtors’ multi-client data as of December 31, 2011 and 2012 was $232 million and $309 million, respectively. Beginning in the last part of 2012 and the first part of 2013, the Debtors began implementing a series of changes designed to transform the focus of their business away from the U.S.-centric Multi-client Services towards Proprietary Services, and in particular to target the more robust international seismic market over the U.S. market that was influenced by competitive conditions and the types and sizes of projects in the U.S.:
- Changes in leadership and staff: In the last eighteen months, nine of the top twelve senior management positions were newly filled either through outside hiring or internal promotions. For this same time period, the total number of employees of the Debtors was reduced by approximately 35%.
- Changes in business mix: At the start of 2013, approximately 54% of the Debtors’ revenues were derived from Multi-client Services and 46% from Proprietary Services. During 2013, this proportional mix of revenues changed to approximately 47% from Multi-client Services and 53% from Proprietary Services. The revenue mix for 2014 is projected to be 28% from Multi-client Services and 72% from Proprietary Services. As of February 28, 2014, Proprietary Services accounts for approximately $165 million and 92% of the
- Debtors’ pro-forma backlog,3 compared to only $35 million and 35% at the end of 2012. All of these changes reflect the priority that the company has placed on Proprietary Services.
- Changes in geographical focus: In support of a greater focus on international operations and opportunities, the Debtors have further decentralized their operations and shifted certain administrative and operational functions to Brazil and Dubai. For 2012, prior to the time the changes in management and increasing focus on international Proprietary Services had been in place sufficiently long to have a meaningful impact, approximately 48% of the Debtors’ total revenues derived from international operations and 52% from domestic sources. In 2013, revenues favored international operations over domestic revenues at a ratio of almost 2:1. The Debtors’ allocation of revenues in 2013 further reflected a more global company with an almost equal balance of expenditures among the United States, Latin America, and the Middle East. The Debtors’ pursuit of the international market is reinforced with 2014 projections: industry-wide seismic spend is expected to grow 7–9% in international markets and only 3%–4% in domestic markets.
- Changes in funding of Multi-client Services: New management has also been less willing to invest heavily in the speculative nature of the Multi-client Services projects. Prior to the changes in management, the Debtors typically performed acquisitions of multi-client data once the projects received on average 65% of their projected costs in pre-commitments from clients. Since late 2012, however, the Debtors have required 100% of projected survey costs in pre-commitments from customers prior to commencing the acquisition of multi-client projects. This has reduced the Debtors’ exposure risk associated with capitalizing on its balance sheet larger amounts for its multi-client library.
- Backlog Growth: The Debtors’ backlog represents contracts for services that have been entered into but which have not yet been completed, constituting a key indicator of future revenue. As of February 28, 2014, the Debtors’ pro-forma backlog (including both Proprietary Services and Multi-client Services) total was approximately $180 million, representing an 80% increase over the backlog for year-end 2012. The first two months of 2014 alone account for almost $80 million in backlog increases. For 2014, the Debtors’ target is to reach $200–$225 million total backlog by the end of the year.
- Reduction in Expenses: In the last six months, management has successfully overseen significant reductions in general and administrative expenses.
“These and other changes resulted in a significant improvement in the Debtors’ Cash EBITDA for 2013.
Refinancing of Bank Credit Agreement in September 2013
“On September 30, 2013, the Debtors entered into the Financing Agreement, providing for a $82.8 million Term Loan A and a commitment for a $22.2 million Term Loan B which was subject to certain potential strategic transactions. The Term Loan B was never drawn, and the commitment was terminated in February 2014. The proceeds from the Term Loan A were used to refinance in full the Debtors’ prior revolving credit facility and to pay related fees and expenses. The commitments under such revolving credit facility were decreasing at September 30, 2013 from $80 million to $67.5 million, and the Debtors desired to refinance such bank debt.
“The Debtors’ internal sources of liquidity, including their cash position, have historically depended to a large extent on the level of demand for their services, namely Proprietary Services and Multi-client Services. Historically, the Debtors have periodically supplemented their internal sources of liquidity with external sources, including borrowings under the previous revolving credit facility described above, as the need arose. However, restrictions in the Financing Agreement and the Indentures substantially limited the ability of Debtors to incur or guarantee additional indebtedness or to grant additional liens on assets. Because the Financing Agreement was fully drawn and provided no additional borrowing capacity, and because GGS’ common stock price was low, access by Debtors to additional debt and equity capital was severely limited and they were substantially dependent on internal sources of liquidity. For this reason, Debtors have focused on enhancing operating cash flows, remaining fully pre-funded on investments in the multi-client library, reducing cost, and pursuing recording equipment and asset sales as means of providing liquidity.
Demand for Liquidity Grew as Sources of Liquidity Shrunk
“The combination of Debtors’ strategic focus on the growing international market and buildup of backlog, combined with almost exclusive reliance on operating cash flow for liquidity, had an unintended consequence in early 2014. In recognition of the Debtors’ strong operating performance record, several customers awarded the Debtors several large-value contracts in Latin America, the Middle East, East Africa, and Alaska. For example, the Debtors increased their backlog by $80 million in just the first two months of 2014 alone.
“Although they resulted in a strong build-up of Debtors’ backlog, these large projects require substantial upfront working capital to position crews and equipment for the work. In addition, the start-up expenditures under these projects were required to be incurred well in advance of when Debtors would be entitled to receive project revenues, which negatively impacts the liquidity of the Debtors during the early phases of such projects. Debtors also experienced in the fourth quarter of 2013 an impairment of their multi-client library in the amount of $61.6 million, reflecting a decrease in the expected cash-flow generation potential of certain portions of the library.
“Highly dependent upon operating cash flow, in early 2014 the Debtors experienced increasingly little room for error in liquidity. By mid-March 2014, the Debtors had experienced a number of relatively small and ordinary problems that, in combination, grew into a full-on liquidity crisis for the short term:
- higher than anticipated working capital requirements and project start-up costs for new international (and to a lesser extent domestic) projects;
- reduced revenues without an equally corresponding decrease in expected costs attributable to reductions in programs in Colombia;
- project interruptions due to permit delays and community relations disruptions resulted in higher than anticipated project costs and increases in estimated taxes in Colombia;
- community relations disruptions and slower than anticipated production in Kenya;
- project cancellations in Libya due to security concerns amid civil conflict, resulting in a loss of cash margin expected from the project; and
- current assessments related to sales and use taxes in Texas dating back to years 2008-2011.
“As the list of unexpected issues grew, the Debtors began to have difficulty meeting even their short-term liquidity needs.
“Compounding their liquidity problems, the Debtors also faced potential covenant defaults under the Financing Agreement related to liquidity and restatement of historical financial statements and related consolidated financial information for various annual and quarterly periods going back to 2009. As result of these restatements, management concluded that there were material weaknesses in the Debtors’ internal controls and accounting procedures. GGS did not file its annual report with the Securities and Exchange Commission (“SEC”) (Form 10-K) on March 17, 2014, and instead filed an 8-K disclosing the events related to the restatements. This securities filing implicated potential covenant defaults under the Financing Agreement and, by extension, the Indentures. On the same date, March 17, 2014, the Debtors entered into a Forbearance Agreement with the lenders under the Financing Agreement under which the lenders agreed to forbear from exercising any rights and remedies in connection with existing or potential future specified defaults and events of default. The forbearance period was subject to termination by such lenders beginning on March 24, 2014. On March 24, 2014, the day before the Petition Date, the lenders gave notice of such termination and acceleration of the debt under the Financing Agreement.
“Notwithstanding the Debtors’ recent strides in operational improvements, the Debtors’ debt-service obligations—which run almost $40 million a year in interest alone—made it impossible for the Debtors to meet their short-term liquidity needs when faced with unexpected challenges. Facing these challenges, the Debtors chose to pursue debtor-in-possession financing to bridge their immediate needs while exploring a longer-term solution for their capital structure.
The Debtors’ Strategic Path Forward
“These cases were filed for hallmark bankruptcy rationales—to achieve a breathing spell for the development of restructuring alternatives, to implement debtor-in-possession financing to resolve liquidity needs, and to maximize value for the benefit of all of the Debtors’ stakeholders.
“From the protection of chapter 11, the Debtors and their advisors are developing a dual-track strategic path forward. First, with the additional liquidity of the debtor-in-possession financing, the Debtors believe that a stand-alone plan of reorganization is possible. Deleveraging would immediately add substantial additional liquidity, perhaps as much as $20-$30 million per year, by relief from debt service. At the same time, the Debtors, with the aid of their restructuring advisors, will explore and develop alternative strategies, which could include a process for a sale of assets, a merger or business-combination transaction, or another form of recapitalization. Notably, certain holders of the Notes, as the proposed DIP Lenders, continue to have confidence in the Debtors and their future, and are willing to provide additional financing.