The U.S. subsidiaries of Linc Energy Ltd. have filed for bankruptcy protection.
In late May, Linc USA GP and 10 other subsidiaries of the Australian independent, including Linc Energy Resources Inc. and Linc Alaska Resources LLC, filed for chapter 11 bankruptcy protection in a federal bankruptcy court in the Southern District of Texas.
Aggressive and expensive drilling programs in Alaska and the U.S. Gulf Coast in recent years left the companies “especially vulnerable to the recent decline in oil prices,” according to testimony from Vice President for Corporate Development Jude Rolfes. The subsidiaries were also pursuing development in the Powder River basin of Wyoming.
During its six-year tenure in Alaska, Linc pursued conventional natural gas exploration in the Cook Inlet basin, underground coal gasification in Cook Inlet and the Interior and oil exploration at the Umiat field in the National Petroleum Reserve-Alaska. But the company suspended its Cook Inlet and Interior programs in recent years to focus entirely on the Umiat project, which the company still believes is primed for development.
Linc Alaska Resources LLC owns an 84.5 percent stake in Renaissance Umiat LLC, which holds the federal and state leases comprising the 18,540-acre Umiat prospect. Arctic Falcon Exploration LLC holds 15 percent and Rutter & Wilbanks Corp. owns 0.5 percent. Although the interest Linc holds in the company is one of the assets included in reorganization, Renaissance Umiat LLC is not one of the debtors in the bankruptcy case.
Big spendingThrough that program, Linc spent approximately $120 million on a two-well appraisal program at Umiat in 2013 and 2014 “for the purposes of demonstrating the potential of the Alaska properties and securing a joint venture partner,” according to the company.
While the results were “favorable,” the downturn in prices prevented the company from finding a partner or recovering expenses except through state of Alaska tax credits.
Even so, Linc continued to promote the Umiat development project. Between October 2014 and June 2015, the company proposed schemes ranging from 70 to 150 wells.
By October 2015, the company had reduced the scope of the development to 35 wells, in part because third-party reserve estimates for the field had sharply declined.
At one point, Linc believed Umiat could produce 45,000 barrels per day at its peak, although the company later revised the figure to 30,000 barrels per day. The most recent third party analysis estimated probable reserves of nearly 99 million barrels of oil equivalent at Umiat. Generally, “probable” means that actual recovered volumes are expected to have at least a 50 percent chance of meeting or exceeding the estimate.
Over the same period of time, Linc was also pursuing a sizeable oil development program at its various properties in the Gulf Coast, drilling 66 wells between 2012 and 2014.
When oil prices began declining in late 2014, Linc suspended its drilling programs and reduced its lease operating expenses by 44 percent to below $30 net per barrel, according to the company. Even with these changes, decreasing oil prices cut into revenues and, at the same time, approximately $22 million in interest payments were due in April 2015.
By amending its borrowing terms and getting some money from its Australian parent company, Linc was able to satisfy those initial payments, only to face additional deadlines in October 2015 and April 2016. But in April 2016, the parent company entered “voluntary administration” in Australia, which led to a recommendation to liquidate.
With the grace period on the April 2016 due date nearing, Linc filed for bankruptcy.
In addition to paying tax credits on the exploration work, the state of Alaska spent considerable time and money studying the benefits of building a road to Umiat. The project faced local concerns about the impact son subsistence resources and opposition to “corporate welfare.” The Parnell administration suspended the project in mid-2013.