Applicant's leases are located in the highly developed midcontinent region where pipe lines are available to handle all oil and gas production The several properties have, at least in many instances, been poorly managed and have suffered for need of proper attention and preservation because of lack of working capital. Under the concentrated management as planned and with working capital available it is believed that all leases can be more economically operated. Aside from the creditors named under "Participation" there are others who, in order to make the plan effective, will subordinate a part or all of their claim or will accept stock of the applicant as follows: Republic Steel Corp. supplied Texmass with pipe and other items that went into its wells. It is willing to take $800,000 cash and subordinate the balance. (Its security is a second mortgage on certain leases.) "The Syndicate" consists of a group of men who, in 1948, advanced Texmass $975,000 for working capital. They are subordinating their claim to all. Investors Group consists of some 350 individuals, trusts, and institutions, who invested $8,600,000 in leases in which Texmass is also interested. For their interests they now agree to accept $1,000,000 in cash, will stand by for $1,000,000 and accept preferred stock of the consolidated company (applicant) in the amount of $4,600,000. The four named individuals had claims against Petroleum Reserve Corp. for a total of $207,500 on which they agree to stand by. It is reiterated that the urgent need of the consolidated companies is funds with which to defray the cost of rehabilitating its wells and making some improvements. The insurance companies and banks whose notes are secured by assignments of oil and gas leases have been receiving 75 percent of the proceeds from production which did not leave enough cash for working capital. By participating in this loan to the extent of 50 percent of the amounts owing them by the applicant they are suffering a dilution of the collateral held and are agreeing to accept much slower amortization in order that the plan for conserving the properties might be effective. The character of the business of the applicant and its proposed use of borrowed money involved many features which tend to preclude favorable recommendation by an examiner when viewed from a strict credit standpoint, such as: 1. Repayment within a period of 10 years is highly improbable unless rehabilitation should make the properties attractive for purchase by a major oil company. 2. It is apparent that the yield from existing oil and gas wells that would be available for principal and interest payments on the loan would prove insufficient to repay the loan in full, unless rehabilitation of existing wells and the drilling of new ones should increase ultimate yield far in excess of that estimated by the geologist as coming from existing wells. 3. In the event drilling of new wells were deemed desirable, the extent of need of further advances by RFC to cover cost in excess of that anticipated and provided in the initial loan would be difficult to determine in advance. 4. Should it become necessary to salvage leasehold equipment, which is the only tangible asset offered as collateral, it is doubtful that it would liquidate for the amount stated as loan value. Features favorable to a loan are: 1. A capable management which will conduct the affairs of the combined interests more efficiently and economically than has been done in the past. Compensation for their services is to come only after this indebtedness is satisfied. 2. Participation by present mortgage holders and others to the extent of 50 percent of each of their respective claims. 3. Possibility of net realization from proven but yet undrilled locations, sufficient to warrant added expenditures, but which will have to be financed by RFC in addition to the $1,500,000 working capital requested in the initial application. 4. Conservation of interests of numerous "investors" who are contributing their unencumbered equity holdings to augment the collateral offered by Texmass Petroleum Co. Recommendation of Washington Examiner.-Decline from a credit standpoint. WILLIAM J. ROCHELLE, Examiner. COMMENTS OF REVIEW COMMITTEE The committee recommended decline of this applicant's previous request for a loan of $18,950,000. The purpose was felt to be much less in the public interest than it was in the financial interest of some banks and insurance companies, and for the potential benefit of a group of individuals, neither of whom offered a participation in the loan or was willing to inject new cash into the enterprise. Adequacy of the collateral and ability to repay from operations were, in the committee's opinion, questionable. In its present request the applicant, in our opinion, has not improved these factors sufficiently to justify a favorable recommendation notwithstanding that the loan amount has been reduced to $15,638,513 and certain of the bank and insurance company creditors have offered to participate approximately 30 percent. Reduction of the loan is largely at the sacrifice of working capital which is vital to the enterprise and would have to be provided later. The proposal to consolidate these several interests is a very complex and confused deal. The interested parties advise that after the reorganization the company will owe approximately $26,000,000, and without drilling any additional wells Mr. Garrett, the geologist, estimates that there should be a future net revenue of about $28,000,000. Further, these parties say that unless something is done immediately, the value will be lost to them. After the reorganization is completed and if the loan is approved, two individuals will own 60 percent of the equity interest without any cash investment. One of the interested parties, Mr. A. W. Kinkade, is now president and chairman of the Fourth National Bank, Wichita, Kans. It is expected that he will resign and become active in the reorganized company. His bank is to receive some $600,000, which the Swiss Oil Co. and Midway Oils, Inc., are now owing that institution. Also, National Cooperative Refinery Association is indebted to his and another bank in the approximate amount of $1,000,000; $700,000 of the loan is going to be used to buy leases from National Cooperative Refinery Association. Mr. Kinkade's bank may receive a substantial part of this sum. When asked if his bank would participate, he stated quite definitely that it would not. The reason given was that he was leaving the bank and, therefore, it would not be interested in carrying these loans any longer, nor would they be interested in participating with the RFC. Further, he did not feel it would be proper to have his bank participate in a loan to a company that he was becoming interested in. One million dollars of the proceeds of the loan is to be used to pay the investors group. These people are comparable to stockholders in a corporation today. The same is true of the National Cooperative Refinery Association. Further, $400,000 of the loan is going to be used to pay a bank in Boston. At the present time this loan is endorsed by four wealthy individuals. Under the proposal, the bank will participate to the extent of $200,000. These individuals would continue to endorse the $200,000, but would be released from the guaranty on the balance. A statement was made on September 26, 1949, by one of the interested parties that Texmass Petroleum Co., is in a precarious position. Creditors are pressing; Republic Steel, a creditor to the extent of $1,800,000, has threatened suit. In the reorganization Republic Steel is to receive $800,000 cash and stand by on $1,000,000. Republic Steel at the present time has a second mortgage on Texmass properties, which are encumbered with prior liens of $7,500,000. It is difficult to understand, and we question whether we have the full story, why a man of Mr. Kinkade's caliber would resign his position in the bank to take over the management of an oil company without compensation when on the face of it, unless sale is made as referred to below, it will take some 20 years before he can expect any return on the stock which he is to be given when the reorganization is completed. The Garrett report brings out the following points: (1) Fair market value of the properties offered as collateral will be approximately $14,300,000. (2) The rehabilitation contemplated will not increase the total income materially but will accelerate it. (3) There is a trend toward overproduction which will result in greater restrictions and lower prices. (4) The drilling of new wells, if done in an orderly manner, will not materially increase the production, but it will maintain it at the present level. (5) On the ability to pay, no loan of sufficient size to take care of the corporation's indebtedness is in any way justified. Mr. Garrett modified this statement by saying that he was wrong in his estimate on income taxes and that the figures submitted by the company, showing that a loan of $14,200,000 could be reduced to $5,000,000 by applying all of the net income to the loan, were, in his opinion, a fair estimate. As we stated before, the case is very complicated and many questions cannot be satisfactorily answered. For instance, the National Cooperative Refinery Association is selling properties valued at $2,400,000 for $700,000 in cash, and a $200,000 deferred and subordinated obligation. The same is true of Swiss Oil Co. and Midway Oils, Inc. In this instance, they are to receive $800,000 for properties valued at $3,500,000. The insurance loans were made in 1947. At that time a great portion of the stock of Texmass was retired and the stockholders received $2,300,000 of the proceeds of the loan. Mr. Clark, a representative of the investors group, stated today that these funds were again loaned to Texmass to protect the properties, or invested in Petroleum Reserve. It is difficult for the Committee to see any great public interest for from all the figures and statements we have received, creditors and investors can be paid a hundred cents on the dollar if the present income remains constant and potential oil reserves materialize. The two individuals who are to own 60 percent of all of the stock of the new company can materially benefit from a speculative standpoint, for after the consolidation and the granting of the loan, the properties will be inte grated and it is possible that they could be sold for a handsome profit, if drilling new wells should result in substantial production. The interested parties do not agree with the Garrett report in that they think that he should have assigned some loan value to the proven reserves, that his statement with respect to the income over a period of years is not correct and the trend of lower prices is not entirely true because at the present time prices are stiffening rather than going down. The interested parties are confident that income will be increased substantially through the drilling of additional wells and by the competent management that is going to take over. Apparently, from statement made, the management has not been satisfactory, but whether the new management can do better is still unproven. It is believed that if a loan is made it will have to be increased from time to time in order to drill the new wells and keep up production, unless the new management is able to increase the production on lower operating costs. Review committee recommends.-Decline for the reasons that 1. The loan has little, if any, public interest. 2. Proposed rehabilitation is in reality a salvage operation for which there should be a further injection of risk capital. A loan of an amount that would properly rehabilitate and develop the properties is not warranted. 3. Loan is largely a bail out of investors and certain creditors who presently appear to be faced with a loss. 4. Report of consultant, Mr. M. M. Garrett, is not encouraging as to repayment of loan from earnings and does not find sufficient tangible collateral. G. P. LUCE. J. C. KITT. T. E. PARKS. R. G. RHETT. Attachments: Lettergram from L. B. Glidden, agency manager, dated September 13, 1949. Report of Business Loan Branch dated July 21, 1949. Memorandum of Mr. E. R. Willard, engineer, dated September 16, 1949, [Lettergram] LOAN AGENCY OF THE RECONSTRUCTION FINANCE CORPORATION, 315 Cotton Exchange Bldg., Dallas 1, Tex., September 13, 1949. Howard-Chief, Business Loan Branch, Office of Loans, RFC, Washington. Re Texmass Petroleum Co., Dallas, Tex., supplemental report. There is enclosed herewith supplemental application of the captioned company for a loan, which supplement is based upon certain changes including a small amount of additional collateral, a small reduction in debt payment and immediate participation by present debt holders to the extent of $4,861,079. In line with authorization of the Board, valuation reports of the collateral offered have been made by Melvin M. Garrett, consulting geologist of this city, and Mr. Garrett advises me that completed reports were forwarded to Mr. Dodds yesterday. Copies of the reports have also been furnished us together with copies of Mr. Garrett's replies to two letters addressed to him by Mr. Dodds on September 15, 1949. These reports set a net revenue on the existing, producing wells of $28,650,000. Mr. Garrett does not give a dollar valuation on the undeveloped reserves; he does set, however, the net reserves on the undeveloped portion of the leases at 14,196,384 barrels and the applicant, in arriving at a collateral value, has used a basis in line with report of Stanley C. Herold of 60 cents per barrel net on the low-gravity California reserves and a value of $1 net on the high-gravity Texas reserves. I have discussed both the reports and the method of evaluation of undeveloped reserves with members of our advisory committee who are in the oil business and/or officers of banks specializing in oil loans and they advise that, in their opinion, the method of evaluating the undeveloped reserves is both fair and conservative. Mr. Garrett advises me that Mr. Dodd's letter requested his opinion of the contemplated management of Texmass which he had not given as he did not feel that he knew the parties well enough to be justified in evaluating their ability in the present situation. He did state, however, that in his opinion, although he had no doubt that Mr. Kincaid was a good banker with lots of experience in oil financing and that Mr. Hatcher was a good attorney with vast experience, a large oil company such as this should include in its executive staff an A-1 petroleum production engineer. I think we would all agree with that thought and if the loan is approved, requirement to that effect should be made. It is noted that Mr. Garrett does not recommend a loan based predominantly upon his estimates of annual net income and taking into consideration the very large interest-bearing debt load and income-tax liability. In my opinion, and based upon the evaluations of collateral now submitted, the loan now requested would be so secured as reasonably to assure repayment, but the question of ability to repay in view of the heavy interest load must be given great consideration. Net income as outlined in Mr. Garrett's report, is, of course, based upon the present properties in their present condition plus the fact that the results of poor management over a long period of time are still apparent in the monthly expense of the company. Due to tremendous losses and certain advantages to producing companies in the internal-revenue laws, the matter of income tax does not appear important for the next 3 or 4 years and, under competent management, there is no question in my mind that expense can be materially reduced without affecting gross income. The present evaluation of gross income is, of course, based upon production from the present properties and Mr. Garrett's estimate that proper development would not increase this gross income more than 20 percent; however, liquidation of the company is not contemplated and with the acquisition of new leases by a competent management and reasonable expenditures for drilling on such newly acquired leases the income should materially increase within a reasonable period of time. As I believe that the contemplated management is competent to produce these results with the assistance of the production engineer recommended above, I recommend that the requested loan be granted in the amount of $15,638,513 under the terms and conditions outlined in Examiner Herrington's report. L. B. GLIDDEN, Agency Manager. OFFICE OF LOANS, BUSINESS LOAN BRANCH-NEW LOAN Date of application: March 30, 1949. Business.-Production of oil and gas. JULY 21, 1949. The applicant is to be the continuing entity growing out of a merger of properties of Texmass Petroleum Co. (and a group to whom it has assigned oil rights, known as the investors group), Petroleum Reserve Corp., Dallas, Tex.; Swiss Oil Co., Dallas, Tex.; and Midway Oils, Inc., Topeka, Kans. Pursuant to the plan of merging these assets and assumption of certain liabilities of the respective entities for the purpose of obtaining a loan from RFC, the future management will consist of two outstanding, capable and experienced oil operators and businessmen. Stock of the applicant is to be deposited in a voting trust, and a general rehabilitation, restoration and operating program will be conducted. Proceeds of the loan are requested for the purpose of paying all mortgage indebtedness against the properties constituting the collateral, accounts payable, and cost of acquiring from National Cooperative Refinery Association its undivided one-half interest in certain producing properties owned jointly by it and Swiss Oil Co., and, further, to provide working capital to be used in cleaning out and rehabilitating existing producing wells that need reconditioning and defray cost of drilling new oil wells on proven properties. Under the conditions imposed by the agency, the loan recommended by it will meet the requirements if interested parties and some creditors will accept subordinated 3-percent debentures and preferred stock as a means of standing by. All oil runs and proceeds from sales of gas are to be assigned, 50 percent to be applied on principal and interest of the loan, 10 percent to be held as cash collateral, and the remaining 40 percent to be released by the agency to the applicant as needed, to defray cost of operating the properties and paying taxes. Loan applied for.-$18,950,000 (reduced from $22,500,000 by letter dated June 7, 1949). Maturity requested.-July 1, 1959. Participation.-None. |