QUEST RESOURCE CORP (QRHC) company history: the story so far

History

Quest Resource built a Cherokee Basin gas business on heavy debt, was hit by a $10 million fraud by its former CEO, and was delisted in March 2010 while attempting a rescue recombination.

2002-2003: Building a Cherokee Basin base

Quest's story began in November 2002, when it issued 5,380,785 shares, about 42.0% of the company afterwards, to Jerry D. Cash for his company STP Cherokee. That company held rights to about 48,000 acres and operated about 130 wells in southeast Kansas and northeast Oklahoma. Cash became Chairman, Co-CEO and CFO. A voting agreement let him and president Douglas Lamb elect all directors. In the same filing, Quest said it had issued 330,000 shares to Lamb-family entities for a pipeline and a marketing business, with no appraisals or fairness opinions.

In June 2003 Quest bought about 80 Kansas oil and gas leases for about $2.0 million. It also issued 500,000 shares for a pipeline operator, Producers Service Inc. and its subsidiary J-W Gas Gathering. Quest put its pipeline network at about 600 miles afterwards.

2003-2006: The Devon purchase and a debt-funded expansion

The deal that made Quest came in December 2003. It paid about $126 million for Devon Energy's Cherokee Basin assets, adding about 95.9 billion cubic feet equivalent of proved reserves. The assets went into a new subsidiary, Quest Cherokee. Almost all of it was financed by others: Banc One arranged a $70 million revolver and a $35 million term loan, and ArcLight's Cherokee Energy Partners put in about $51 million. In February 2005 the lenders under Quest Cherokee's UBS credit agreement waived existing defaults. In return Quest Cherokee accepted a higher interest margin and $7 million of extra subordinated notes to Cherokee Energy Partners, and it received $5 million of additional Term B loans.

In November 2005 Quest raised $198.4 million gross by selling 15,258,144 shares in a private placement, leaving about 22.1 million shares outstanding. The money was meant mainly to buy out ArcLight, and Quest and Quest Cherokee signed new credit agreements, a $100 million senior facility and a $100 million second lien loan. These replaced the UBS facility. By March 2006 production had reached 30.6 million cubic feet a day, and a $105.7 million drilling budget was approved for 2006. In June 2006 Quest added a $75 million third lien loan from Guggenheim.

2006-2008: Spinning out the partnerships

Quest then sold stakes in its own businesses. In December 2006 it formed Quest Midstream Partners, which took the Cherokee Basin gathering system, and outside funds paid $90 million for 4.86 million units. In April 2007 Guggenheim lenders waived a breach of the debt-to-earnings test, and Quest paid them $1,687,500. In November 2007 Quest Midstream bought the KPC Pipeline, and Quest Energy Partners was floated, with Quest contributing Quest Cherokee to it. The costly Guggenheim loans were replaced by a $250 million RBC revolver, but in April 2008 its maturity was shortened to November 2010 and its interest raised.

Quest also tried to expand through a merger with Pinnacle Gas Resources, agreed in October 2007 and reworked in February 2008 so Quest holders would own about 60.5%. It ended in May 2008 when the deal was not completed in time. Instead, in July 2008 Quest bought PetroEdge Resources (WV) for about $140 million, funded partly by selling 8.8 million shares at $10.25. It also took a $35 million term loan and a $45 million second lien loan at much higher cost.

2008-2009: The Cash transfers and restatement

In September 2008 the auditor Eide Bailly, engaged only that August, said it would resign. In October RBC waived possible covenant breaches tied to questionable transfers of funds by Jerry Cash, now described as former Chairman and CEO. The company put the transfers at about $10 million. Borrowing became far dearer, at LIBOR plus 10% on Quest's own loan. Further waivers followed in November, and Nasdaq warned of delisting over the late September 2008 quarterly report.

On December 31, 2008 the board said its 2005-2007 accounts could not be relied on. The transfers had run from June 2004 to July 1, 2008, and the investigation began after an inquiry from the Oklahoma Department of Securities. Other accounting errors and weak internal controls were also found. Nasdaq notices piled up through 2009. In May 2009 the lawsuits over the transfers were settled for about $2.4 million cash, 60% of an entity's interest in a Louisiana gas well and a Texas landfill gas project, and Oklahoma oil properties for Quest Energy Partners. The values of the non-cash assets were not given, and the company said it would have preferred assets equal to the transfers and investigation costs. In July 2009 a Nasdaq panel let Quest stay listed on condition of filing overdue reports by August 15.

2009-2010: Recombination and the end of listing

In July 2009 Quest agreed to combine with its two partnerships under a new holding company, later named PostRock Energy Corporation. Quest holders would receive 0.0575 PostRock share per share. In September Quest restated its own RBC credit agreement, pushing its term loan maturity to January 2012 and giving lenders a 2% overriding royalty. Nasdaq also warned that the share price had been below $1 for 30 business days. In November RBC cut the Quest Cherokee borrowing base from $160 million to $136.9 million. On December 17, 2009 four facilities were amended, with Quest Cherokee repaying a $15 million deficiency, and maturities were tied to the recombination closing by July 10, 2010.

In January 2010 Nasdaq flagged that no 2009 annual meeting had been held. The definitive proxy was mailed around February 8, 2010 for a March 5 vote. It said the three companies were in difficult economic circumstances and that the recombination would substantially improve their ability to avoid bankruptcy. Former Quest holders would own about 23% of PostRock. On March 5, 2010 the exchange filed to remove a class of Quest securities from listing, and on March 11 Quest deregistered its securities, ending its obligation to file reports with the SEC.

Written from the 40 story beats below (2002 to 11 Mar 2010), which come from the company's own announcements and filings.

Beat by beat

The events that changed the company's story, in plain English, each written against everything known about the company at the time. The dot shows whether it was good, bad or neutral for shareholders.

2010

11 Mar
QUEST RESOURCE CORP deregistered its securities, ending its obligation to file reports with the SEC.
listing compliance notice
5 Mar
QUEST RESOURCE CORP's exchange filed to remove a class of its securities from listing.
listing compliance notice
8 Feb
Quest filed its definitive joint proxy statement, first mailed around February 8, 2010, for a March 5, 2010 stockholder meeting and a QELP unitholder meeting to vote on the PostRock recombination. After the deal, former QRCP stockholders would own about 23% of PostRock, QELP common unitholders (other than QRCP) about 33%, and QMLP common unitholders about 44%. The boards say the three companies are in difficult economic circumstances and that the recombination would substantially improve their ability to avoid bankruptcy. Stockholders will also vote on a PostRock incentive plan and re-elect four directors. This moves the recombination thread forward, and the proxy and the SEC review are no longer outstanding. The filing text is truncated.
business combination
11 Jan
On January 5, 2010 Nasdaq told Quest its stock is subject to delisting because it did not hold its 2009 annual meeting by December 31, 2009. Quest says it expected the letter, will request a hearing by January 12 (which stays the delisting), and delayed the meeting to combine it with the recombination vote, to be held after the SEC declares the PostRock S-4 effective. This is a new listing problem on top of the earlier bid price deficiency.
listing compliance notice

2009

21 Dec
On December 17, 2009 Quest and its subsidiaries signed amendments to four credit facilities, which resolve the repeated short second lien extensions and the Cherokee borrowing base shortfall. The Cherokee revolver became a term loan with no new borrowing, maturing March 31, 2011 (July 11, 2010 if the recombination has not closed by July 10, 2010), with required principal reductions from $141 million at March 31, 2010 down to $134 million at December 31, 2010, and a cap on capital spending. The borrowing base was reset at $145 million, leaving a $15 million deficiency that Quest Cherokee repaid on December 17. The second lien loan got the same maturity, 2% more interest (deferred), and a 2.10% fee. The Quest Midstream facility also became a term loan maturing on the same dates, with looser ratios for the March 2010 quarter and capital spending caps. Quest will guarantee the partnership loans after the recombination and pledge its equity interests, and a change of control of PostRock would become an event of default. The filing text is truncated.
debt financing
25 Nov
On November 20, 2009 the Quest Cherokee second lien loan maturity was pushed again, from November 20 to December 7, 2009 (sixth amendment, effective November 23). Separately, on November 19 RBC cut the Quest Cherokee revolver borrowing base from $160 million to $136.9 million, leaving borrowings $23.1 million over the limit. Quest Cherokee has until December 19, 2009 to choose between repaying the shortfall within 30 days, paying it in four monthly installments of $5.8 million, or pledging more oil and gas properties as collateral. This continues the string of short second lien extensions and adds a new pressure on the Cherokee revolver.
debt financing
8 Oct
On October 2, 2009 the parties amended the July merger agreement, which now names the new holding company PostRock Energy Corporation. The amendment mainly restructures the merger steps, replaces Edward Russell with Gabriel Hammond as a proposed director, and cancels any PostRock shares Quest holds after closing. It also allows a distribution of extra QMLP common units to correct an exchange-ratio error caused by an investor abandoning units, so the exchange ratios stay unchanged. Alerian joined the support agreement, bringing holders of about 73% of QMLP common units committed to vote in favor, so the filing says QMLP unitholder approval is assured unless that agreement is terminated. PostRock filed its S-4 on October 6, 2009. Quest stockholder and QELP approvals are still needed. The filing text is truncated.
business combination
17 Sept
On September 11, 2009 Quest signed a Second Amended and Restated Credit Agreement with RBC. It adds a revolver of $5.6m (rising to $8.0m after November 30, 2009) for West Virginia wells and corporate costs. The term loan maturity moves from July 2010 to January 11, 2012, with $6m of deferred payments due July 11, 2010, and its interest rises to base rate plus 10%. Instead of interest the revolver carries a $2.0m facility fee due July 11, 2010, and lenders get a 2% overriding royalty on Quest Eastern's and Quest Oil & Gas's properties, which is returned if conditions are met by July 11, 2010. Financial covenants and the equity-proceeds repayment requirement are removed, and the planned recombination is not a default, but it is an event of default if by November 30, 2009 a joint proxy statement is not filed, the Quest Energy and Quest Midstream lenders have not approved it, and the boards have not approved new credit facilities. Separately, on September 15 Nasdaq warned that the share price had been under $1 for 30 business days, with until March 15, 2010 to regain compliance. The filing gives no price level beyond that threshold.
listing compliance notice
17 July
On July 15, 2009 the Nasdaq hearing panel granted Quest's request to stay listed, on condition that it files its September 30, 2008 and March 31, 2009 quarterly reports by August 15, 2009. The press release says the 2008 10-K was filed June 3, 2009 and amended 2008 quarterly reports for March and June were filed July 14, 2009. Delisting remains possible if the August 15 deadline is missed. This resolves the June 3 appeal but leaves a new deadline open.
listing compliance notice
7 July
On July 2, 2009 Quest signed a merger agreement with its two partnerships, Quest Energy Partners and Quest Midstream Partners, to combine all three under a new company, New Quest Holdings. Each Quest share would receive 0.0575 New Quest share; QELP common units (other than those Quest owns) get 0.2859 and QMLP common units get 0.4033 New Quest shares, while the partnerships' subordinated units and incentive rights are cancelled for nothing. Closing needs approval from Quest stockholders and the partnership unitholders, an effective S-4 registration, Nasdaq listing, lender consents and new credit facilities, and either side can terminate if it has not closed by March 31, 2010. The filing lists a nine-member board expected to include Lawler as chief executive and Pittman as chairman, and Quest also amended its shareholder rights plan so the deal does not trigger it. The filing text is truncated, so further terms are not covered.
business combination
26 May
On May 19, 2009 Quest, Quest Energy Partners and Quest Midstream Partners settled the lawsuits over the $10 million of questionable transfers to an entity controlled by former CEO Jerry Cash. Quest received about $2.4 million in cash plus 60% of the entity's interest in a Louisiana gas well and a Texas landfill gas project, and Quest Energy Partners received the stock of a company owning Oklahoma oil-producing properties. The President said the company would have preferred assets equal to the transfers and investigation costs. The filing gives no values for the non-cash assets, so recovery is well short of $10 million in cash terms. This resolves the lawsuit part of the Cash thread.
material agreement
18 May
On May 12, 2009 Nasdaq issued a staff determination that Quest's stock is subject to delisting, because the September 2008 quarterly report and the 2008 annual report were still unfiled, and the March 2009 quarterly report was also late. Nasdaq had not granted Quest's request for an extension to May 31, 2009. Quest requested a hearing on May 18, which automatically holds off delisting until June 3, 2009, and asked the panel for more time. The company says there is no assurance of success. This is the escalation of the filing-delay problem flagged in November 2008 and April 2009, and the May 11 target was missed.
listing compliance notice
3 Apr
On March 30, 2009 Nasdaq told Quest it was also out of compliance because the 2008 annual report was not filed on time, adding to the November 2008 notice over the late September 2008 quarterly report. Nasdaq had already extended the deadline for that quarterly report to May 11, 2009, and Quest must give Nasdaq an updated compliance plan by April 14, 2009. Quest says it aims to file re-audited and restated 2005-2007 accounts and audited 2008 accounts, being done by UHY, by May 11, 2009. Delisting remains a risk if that is missed.
listing compliance notice
2 Jan
On December 31, 2008 the board decided that Quest's audited accounts for 2005-2007 and its unaudited accounts for the first two quarters of 2008 can no longer be relied on, and will be restated. The restatement reflects the roughly $10 million of transfers to entities controlled by former CEO Jerry Cash, which began in June 2004 and ran to July 1, 2008 (extra expense of $2m in 2005, $6m in 2006 and $2m in 2007), and cash is reduced and the accumulated deficit increased by $10 million. The investigation began after an inquiry from the Oklahoma Department of Securities. Separate errors were also found in derivative accounting, stock compensation, depreciation and impairment, with size not yet estimated, and the board concluded the company has material weaknesses in internal controls. Quest is seeking restitution from Cash with no assurance of recovery, and cannot say when the restated accounts will be ready. This explains the late filings and Nasdaq notices, and the earlier mention of possible restatements.
financial restatement

2008

25 Nov
On November 19, 2008 Nasdaq told Quest it no longer met listing rules because it had not filed its September 30, 2008 quarterly report on time (a late-filing notice had been made November 12). Quest has until January 21, 2009 to submit a compliance plan, and Nasdaq can allow up to May 11, 2009 to regain compliance; otherwise it faces delisting, which Quest could appeal. This follows the auditor turnover and the investigation of the former CEO's transfers, though the filing itself does not state why the report was late.
listing compliance notice
7 Nov
On November 4, 2008 Quest and its partnerships signed further lender amendments, again to waive possible breaches from the transfers by former CEO Cash and unsettled intercompany accounts. Quest's own $6m extra loan commitment is clarified to shrink dollar for dollar as Quest keeps asset-sale proceeds. Quest Cherokee's $45m second lien loan was extended from January 11, 2009 to September 30, 2009 at LIBOR plus 9.0% (3.5% floor), with $3.8m quarterly repayments, a $0.40 per unit cap on Quest Energy's quarterly distribution, minimum liquidity of $14m at March 31, 2009 and $20m at June 30, 2009, 2009 capex capped at $30m, and Quest Energy required to raise equity or debt or refinance by mid-2009. The Cherokee revolver had a $190m borrowing base with $183m borrowed and now costs LIBOR plus 4.0% in a transition period. Bluestem had $128m of $135m drawn, also at LIBOR plus 4% in transition. Intercompany amounts Quest owes Quest Energy must be repaid by February 27, 2009. These follow up the October waivers, and the subsidiaries' debt is now much costlier and more tightly restricted than the 2007-2008 terms. The filing text is truncated, so further Bluestem terms are not covered.
material agreement
31 Oct
On October 24, 2008 Quest and RBC amended the July 2008 term loan to waive possible covenant breaches tied to 'questionable transfers of funds' by Jerry Cash, described as the company's former Chairman and CEO, and to late settling of intercompany accounts. The press release puts the transfers at about $10 million to an entity controlled by the former CEO. RBC added a $6m term loan due November 30, 2008 ($2m drawn, $4m conditional on amending the Quest Energy and Quest Midstream credit agreements). Interest rises to LIBOR plus 10% (3.5% floor), which the release puts at 13.5% on the existing loan and 14.35% on the new one. Quest also announced the sale of about 22,600 net undeveloped acres in Somerset County, Pennsylvania for about $6.8m, with proceeds going to repay the $2m and speed up principal payments. This reveals the departure of Cash, who led the company in prior filings, and much costlier borrowing; the filing does not say how or why he left.
debt financing
1 Oct
Eide Bailly, engaged only on August 1, 2008, told Quest on September 25 that it is resigning as auditor, effective on the earlier of the filing of the September 30, 2008 quarterly report or November 10, 2008. The filing says there were no disagreements and no reportable events from its review of the June 2008 quarter, and that Quest is still looking for a new auditor to audit future periods and 'any restated financial statements relating to prior periods'. The filing gives no reason for the resignation; the mention of possible restatements is stated but not explained.
auditor change
16 July
On July 11, 2008 Quest completed the PetroEdge WV purchase (renamed Quest Eastern Resource LLC) and immediately agreed to sell its wellbores and related assets for proved developed reserves in West Virginia and New York to Quest Cherokee for about $71.6m. Quest also converted its $50m RBC revolver into a $35m term loan due July 11, 2010 (LIBOR+5.0%, $1.5m quarterly payments from September 30, 2008, fully drawn, secured by Quest's assets other than the two partnerships) with covenants of interest coverage at least 2.5x and leverage at most 2.0x from September 30, 2008. Quest Cherokee also took a six-month $45m second lien term loan (LIBOR+6.5%, rising to 7.0% after October 11, 2008). The new debt is much more expensive than the Cherokee facility priced in November 2007.
asset acquisition disposition
2 July
On July 1, 2008 Quest agreed with RBC Capital Markets and other underwriters to sell 8,800,000 new shares at $10.25 each, with a 30-day option for up to 1,320,000 more. The filing ties this to the equity offering planned to fund the PetroEdge purchase only indirectly, via the earlier press release; it doesn't state the use of proceeds itself. It adds new shares for existing holders, and the filing notes an RBC affiliate also lends to Quest ($50m revolver, to become a $35m term loan) and to Quest Energy Partners and Quest Midstream Partners, and will be lender on a $45m bridge loan to Quest Energy.
material agreement
10 June
On June 5, 2008 Quest agreed to buy PetroEdge Resources (WV) LLC from PetroEdge Resources Partners for about $140m cash (subject to adjustment; $5m deposited), adding roughly 78,000 net acres in West Virginia, Pennsylvania and New York, about 100 Bcfe of proved reserves, with closing expected by July 11, 2008. On June 4 Quest Oil & Gas also paid $4m for a farmout with Bradley Energy on about 32,000 acres in Potter County, Pennsylvania, with a one-year option to buy the deep rights for a further $6.5m. The attached press release says Quest plans to fund the purchase from a planned equity offering and from selling the proved developed reserves to Quest Energy Partners. This replaces the Pinnacle deal with a different push into Appalachia (Marcellus Shale).
material agreement
19 May
The Pinnacle Gas Resources merger agreement was terminated on May 16, 2008 because the deal was not completed by that date; either side could terminate then, and Quest owes no termination fee. This ends the merger thread that began in October 2007, so the planned issuance of shares to Pinnacle holders will not happen. The filing doesn't say why the deal wasn't completed. It also furnishes first-quarter 2008 results (no figures in the text) and announces a letter of intent with a private company for a farm-out giving Quest rights to develop about 30,000 net acres in Pennsylvania for one year.
material agreement termination
23 Apr
Effective April 15, 2008, the lenders to the Quest Cherokee credit agreement (not Quest itself) amended it: maturity moves from November 15, 2012 to November 15, 2010 and interest rises by 1%, to LIBOR plus 2.25%-2.875%. Royal Bank of Canada used its 'market flex' rights because it could not sell down its commitment to its desired hold amount; the option to expand the $250m facility to $350m was eliminated. The filing says that, given lower LIBOR, the increase does not currently change the partnership's 2008 interest expense guidance. This makes the November 2007 refinancing shorter and costlier.
material agreement
7 Feb
On February 6, 2008 Quest filed the registration statement (Form S-4) and preliminary joint proxy for the Pinnacle Gas Resources merger on the amended terms: 0.5278 Quest shares per Pinnacle share, leaving former Pinnacle holders with about 39.5%. It registers 15,781,617 new Quest shares and asks both companies' holders to vote at special meetings (dates blank); Quest holders also vote on raising the 2005 Omnibus Stock Award Plan share pool from 2,200,000 to 5,000,000. This continues the merger thread and starts the formal approval process.
business combination
6 Feb
On February 6, 2008 Quest and Pinnacle restated their merger agreement, cutting the exchange ratio from 0.6584 to 0.5278 Quest shares per Pinnacle share. Current Quest holders would now own about 60.5% (up from 55%) and Pinnacle holders about 39.5%, and the surviving company becomes Quest Western Resource Corporation. The board would have six directors (four Quest, two Pinnacle). The termination fee stays $3.0m, with a $5.0m fee in certain limited circumstances if Pinnacle terminates. Quest directors agreed to vote for the deal, and the stock plan was amended to bar option repricing. This revises the October 2007 terms in Quest holders' favour on dilution.
business combination

2007

21 Nov
On November 15, 2007, with the initial public offering of Quest Energy Partners, Quest contributed Quest Cherokee (the Cherokee Basin gas producer) to that partnership and received 3,201,521 common units and 8,857,981 subordinated units. Quest's general partner entity received 431,827 general partner units and incentive distribution rights. The Guggenheim loans were replaced by a new five-year $250m RBC revolver with a $160m borrowing base and $75m drawn, and Quest itself was released as a borrower. This resolves the high-cost Guggenheim debt thread (the second and third lien loans) at the Quest Cherokee level, with LIBOR+1.25% to 1.875% pricing. Quest's maximum environmental indemnity under the Omnibus Agreement is $5m.
debt financing
2 Nov
On November 1, 2007 Quest Midstream Partners sold 3,750,000 common units at $20.00 ($75m) in a private placement and used the proceeds toward buying the KPC Pipeline, an interstate gas pipeline from Oklahoma to Missouri, from Enbridge Midcoast Energy and Midcoast Holdings No. One. The partnership's RBC revolver (set up in January 2007) was amended and increased from $75m to $135m, with $95m borrowed, maturing November 1, 2012, and the partnership became a co-borrower. This extends the midstream business beyond the Cherokee Basin gathering system, funded partly by outside investors and partly by more debt.
asset acquisition disposition
16 Oct
On October 15, 2007 Quest agreed to merge with Pinnacle Gas Resources, which would become a wholly-owned subsidiary. Pinnacle holders get 0.6584 Quest shares per share, leaving current Quest holders with about 55% and Pinnacle holders about 45%. Jerry Cash stays Chairman, President and CEO, the board would have seven seats (four Quest, three Pinnacle), and closing is expected in the first or second quarter of 2008 subject to both companies' shareholder votes. A $3.0m termination fee can apply in specified circumstances. For existing shareholders this means substantial dilution.
business combination
26 Apr
On April 25, 2007 Quest's Guggenheim lenders waived a default: Quest and Quest Cherokee had failed the maximum total net debt-to-EBITDA test for the quarter ended March 31, 2007. The ratio limits were reset (4.50x for March 2007, 5.50x for June 2007, easing to 3.0x from September 30, 2008), and Quest paid the lenders $1,687,500. This is the covenant pressure flagged in earlier filings, on the $100m senior, $100m second lien and $75m third lien loans, now breached and waived.
material agreement

2006

29 Dec
Quest sold a stake in its own pipelines: it formed Quest Midstream Partners, dropped the Cherokee Basin gathering system into it through Bluestem Pipeline, and six energy-income funds led by Alerian and Cushing paid $90 million for 4.86 million units at $18.50. Quest kept control through the general partner and locked in the gas volumes with a long-term dedication agreement - cash today in exchange for handing the midstream margin to outside investors, with a buy-back mechanism if the partnership is ever sold.
capital raising announcement
14 June
On June 9, 2006 Quest and Quest Cherokee took a $75 million six-year third lien term loan from Guggenheim at LIBOR+8.5%, fully funded at closing and not repayable before June 9, 2007. The second lien loan was amended to cut its rate from LIBOR+6% to LIBOR+5.5%. Quest says $275m is available under its facilities, of which $225m is drawn, at an average rate of 12.0%. Quest also said it is considering contributing Bluestem Pipeline LLC (its pipeline subsidiary) to a to-be-formed partnership for a public offering expected to raise about $100m gross, with no assurance it will happen. This adds more debt behind the 2005 facilities; the pipeline offering is an early step toward the Quest Midstream Partners structure.
debt financing
30 Mar
Quest reported daily net production of 30.6 MMcf/d exiting March 2006, up about 17% from 26.2 MMcf/d at Dec 31, 2005, and a board-approved 2006 capital budget of $105.7m (versus $47.5m spent in 2005). Proved reserves at Dec 31, 2005 were 134 Bcf, down 6 Bcf from July 2005, with 3P reserves at 299 Bcfe. The company says drilling was restricted by its credit facilities until the Nov 14, 2005 offering and new credit facility, which removed those limits; it also says 71 wells drilled in the last 45 days of 2005 were all classed as undeveloped, so no proved reserves were added. This answers part of the open question about earlier restrictions. Pipeline is stated as about 1,100 miles.
production update

2005

18 Nov
With the placement closing on Nov 14, 2005, Quest and Quest Cherokee entered into two new credit agreements totaling $100 million each: a Senior Credit Agreement ($50m revolver plus $50m first lien term loan, both 5 years) and a $100m six-year second lien term loan (LIBOR+6%) that was fully funded at closing. Quest Cherokee repaid everything owed under its UBS credit agreement and ended its UBS interest rate swap, receiving $378,500. This replaces the UBS facility, resolving the earlier open question about it. The loans carry minimum production and debt-to-EBITDA covenants and are secured by substantially all assets. A registration rights agreement was also signed for the new shares; if the resale registration is not filed within 210 days, CEO Jerry Cash forfeits part of his 2006 bonus, up to $200,000. The excerpt does not show the ArcLight buyout closing (the text is truncated).
asset acquisition disposition
14 Nov
The private placement announced Nov 7 closed on Nov 14, 2005, selling 15,258,144 shares (the 14,650,000 base plus 608,144 from the placement agent's option). Gross proceeds were $198,355,872 and estimated net proceeds $183,470,961, leaving about 22,056,363 shares outstanding (up to about 22,913,219 if the rest of the option is sold). The filing says closing was subject to the new credit facility and the ArcLight purchase agreement; the sale itself is stated as closed. It resolves the pending placement, and existing holders are heavily diluted. Quest also agreed to register the shares for resale.
capital raising announcement
8 Nov
On Nov 7, 2005 Quest agreed to sell 14,650,000 new shares in a private placement (plus a 30-day option for 1,465,000 more), for expected gross proceeds of about $190.45 million (about $13 a share, an inference from the figures). About 21.4 million shares would be outstanding afterwards. The money is meant mainly to buy out ArcLight's investment in Quest Cherokee, repaying ArcLight's notes (about $83.9 million) and buying its equity (about $26.1 million), leaving Quest Cherokee wholly owned. Closing was expected Nov 14, 2005, subject to a new credit facility and the ArcLight deal. This would end the ArcLight partnership begun with the 2003 Devon purchase, but it greatly increases the share count.
capital raising announcement
23 Feb
On Feb 22, 2005 the lenders under Quest Cherokee's UBS credit agreement waived all existing defaults. In return Quest Cherokee agreed to a 1% higher interest margin until its leverage ratio falls below 4.0 to 1.0, and to $7 million of extra subordinated notes to Cherokee Energy Partners. It also received $5 million of additional Term B loans (on top of the original $120 million). The need for a waiver of existing defaults is a warning sign for the main operating subsidiary, though the filing does not say what the defaults were. It does not explain how this UBS facility relates to the 2003 Banc One financing.
debt financing

2004

6 Jan
On Dec 22, 2003 Quest, through a new subsidiary Quest Cherokee, LLC, bought Devon Energy's Cherokee Basin oil and gas assets for about $126 million (about 95.9 Bcfe of proved reserves, 418 gross wells). The filing says this raised wells operated by about 90% and daily production by 138%. It was financed with a $70 million senior revolver and $35 million term loan arranged by Banc One and about $51 million from ArcLight's Cherokee Energy Partners. About $12.3 million of leases awaiting consents were held back, and Quest's Cherokee Basin assets were consolidated into Quest Cherokee. This is a much larger expansion of the Cherokee Basin business built in 2002-2003, and it brings in debt and an outside equity partner in the operating subsidiary. The text of the filing is truncated, so later terms are not covered.
asset acquisition disposition

2003

24 Dec
Quest closed the deal that made it: $126 million cash for Devon Energy's Cherokee Basin leases, pipelines and related assets, adding 95.9 billion cubic feet equivalent of proved reserves at about 89 cents per thousand cubic feet. It rolled everything into a new subsidiary, Quest Cherokee, and financed it entirely with other people's money - $105 million of senior and mezzanine debt from Banc One and $51 million from an ArcLight Capital affiliate. A transformative purchase that also loaded the balance sheet.
asset acquisition disposition
23 June
Quest closed two Kansas purchases on June 6, 2003. Its subsidiary paid about $2.0 million, funded by cash flow and Wells Fargo borrowings, for roughly 80 oil and gas leases. Quest also issued 500,000 shares (about 3.75% of the company) for a pipeline operator, Producers Service Inc., and its subsidiary J-W Gas Gathering. The press release puts Quest's pipeline network at about 600 miles after the deal and the acquired leases at about 3.8 Bcf of net gas reserves. This builds on the Cherokee Basin business gained through the 2002 STP deal.
asset acquisition disposition

2002

19 Nov
On Nov 8, 2002 Quest issued 5,380,785 shares (about 42.0% of the company afterwards) to Jerry D. Cash for all of his company STP Cherokee, which holds rights to about 48,000 acres and operates about 130 wells in southeast Kansas and northeast Oklahoma. A voting agreement between Cash and president Douglas Lamb lets the two of them elect all directors. Cash becomes Chairman, Co-CEO and CFO and Lamb Co-CEO. The filing also says Quest issued 330,000 shares to Lamb-family entities for a pipeline and a marketing business, with no appraisals or fairness opinions. This is the control change behind the 25.1% holder notice filed the day before.
asset acquisition disposition