California Resources Corp
The largest gas and oil production company, California Resources Corp., filed for chapter 11 bankruptcy protection. The energy group is suspected to be a victim of the crash in crude prices that have been influenced by the coronavirus pandemic. The company had been doing well to pay off the inherited debt from Occidental petroleum, but the coronavirus pandemic has since overturned their fortunes. The net debt was $6 billion, which could have possibly been paid off since crude oil traded above $100 by then. Over time the price fell, reaching a low of $30 at the end of 2015. Since the company balance sheet was designed to sell crude oil above $100, it has gone on to struggle for a while. They are seeking relief from $5 billion in debt and interest payments. In addition to this under restructuring, the company is expected to be provided with over $1 billion in debt-in possession financing to see it through. Restructuring under chapter 11 will see the company eliminating more than $5 billion in debt and equity interest. They will be able to consolidate their Elk Hills power plant and their Kern county gas plant. The production company has made it clear to investors that the company might not continue operations if they do not restructure their debt.
Chapter 11, bankruptcy involves the reorganization of assets, debts, and business affairs of a business. The bankruptcy can be filed voluntarily or forced on a business if more than three creditors file a petition in court. The bankruptcy provides a fresh start for the debtor to restructure its debts. Creditors are also equipped with a chance to propose reorganization plans for their credit. A plan that stipulates how the business will pay its debt is created, and the business is allowed to operate under given conditions. During the proceedings, California Resource Corporation will remain operational but will not be able to make some decisions without the court’s permission. Such decisions include the sale of assets or halting business operations. California Resource Company will also not be able to arrange a loan such that it commences immediately the bankruptcy is over. If the business is found of gross incompetence or fraud, a court-appointed trustee takes over and will continue with the bankruptcy proceedings. In the application of the restructuring plan, California Resource Corporation must develop strategies to reduce expenses and renegotiate debts. In areas where assets can be liquidated to settle some creditors, then such action should be pursued. The is a scheduled meeting of creditors on the 8th of September, where they are expected to offer their suggestions on how to handle the matter. After this, they will have to vote by the 5th of October on the best plan of action. The creditors must vote in favor of the restricting plan by California Resource Corporation for it to be approved by the courts. If they do not, the corporation can ask the court to force the creditors to the plan in a cramming process. A hearing has been set for the 8th of the same month, with the last combined hearing on the 13th. If by chance, more disagreements occur, then the court will have to consider other courses of action. In this week’s readings, I learned that when a business is too much in debt and cannot pay up, it can either consider closing its operations, filing for bankruptcy or considering forming mergers and acquisitions to increase their capital base. The case of California Resource Corporation is an excellent example of chapter 11 bankruptcy.