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Torrent to seek OK to tap DIP
by Jamie Mason
Updated 06:25 PM EST, Jun-3-2008

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Bankrupt oil and gas explorer Torrent Energy Corp., wants interim approval to use $589,077 of its debtor-in-possession financing from prepetition lender YA Global Investments LP.

Torrent filed for Chapter 11 on Monday, June 2, in the U.S. Bankruptcy Court for the District of Oregon in Portland with its affiliates, Methane Energy Corp. and Cascadia Energy Corp.

Methane acquires oil and gas properties in Oregon and holds leases to 118,000 acres of land. Cascadia acquires oil and gas properties in Washington state and has 76,000 acres of leased land.

Judge Elizabeth L. Perris will consider the interim use of the DIP and the joint administration of the cases at a hearing before Friday, court papers said. The exact hearing date has not yet been set.

The entire DIP is for $4.5 million and carries pricing of 12% per annum. If Torrent defaults on the DIP, the interest rate increases by 200 basis points. YA Global is owed more than $207,854 on what it lent Torrent prepetition.

According to court papers, Torrent expects to file its prearranged plan of reorganization by June 9. Under the plan, preferred stock will be converted to senior secured convertible debt and unsecured creditors, owed $1 million, will be paid in full.

If the holders of common stock don't accept the plan, then the preferred shareholders will receive 100% of the equity in the company rather than have its stock converted to debt, court papers said.

Torrent filed for Chapter 11 after experiencing higher-than-anticipated drilling and completion costs at its 11 gas wells in Washington and Oregon. It's estimated that 11.7 trillion cubic feet of gas can be taken out of its seven Methane wells.

However, "these reserves are currently unproven and additional drilling and testing will be required to validate that this potential gas resource can be economically produced," court papers said.

Torrent has been unable to "fracture stimulate" its 11 wells, which is a conventional method of injecting fluids and proppant into the coal formations to enhance the wells' productivity and its economic viability, because it's estimated to cost more than $500,000 per well and the company ran into trouble with its disposal of water by-products.

According to court papers, the complex process of obtaining a permit to dump the water by-products into the ocean took longer than expected and delayed the debtors' ability to fracture stimulate its wells.

During the wait, Torrent attempted to solicit new equity, but was unable to because of the company's terms of its outstanding convertible preferred stock, which allowed preferred stock to be converted into common stock, and because Torrent had not yet fracture stimulated its wells. When the company was unable to find new equity investments, it was forced to file for Chapter 11.

The Portland, Ore.-based company engages in the exploration of unconventional natural gas in the Pacific Northwest. The company was created in 2002 through a merger between Scarab Systems Inc. and RV Inc., and was originally in the e-commerce industry. It wasn't until 2003 and 2004 that it shifted its focus to natural gas exploration and changed its name to Torrent Energy.

When Torrent filed for Chapter 11 protection it had four employees. Its publicly traded stock closed at 7.6 cents on Tuesday.

The company listed its assets at $10 million to $50 million and its liabilities at $500,000 to $1 million.

Unsecured creditors include Torrey Hills Capital of Del Mar, Calif. ($50,000), Pfeiffer High Investor Relations Inc. of Denver, Colo. ($17,790), Stockgroup Media Inc. of Vancouver, British Columbia ($10,000), CHF Investor Relations of Tortono ($8,000) and Peterson Sullivan PLLC of Seattle ($3,902).

Debtor counsel Jeanette L. Thomas of Perkins Coie LLP did not return calls for comment.