Velocity Energy Inc. (VCYE) company history: the story so far

History

A shell that tried reinsurance, then became a Longview-backed Texas oil and gas explorer, borrowed heavily, bought West Virginia gas wells in 2009, and deregistered in 2010.

2005-2007: From small notes to a reinsurance plan

The record opens in May 2005, when the company agreed to sell up to $200,000 of secured convertible notes, with warrants, to accredited investors to fund working capital. The notes converted at $0.50 a share and were secured on all company assets.

On December 30, 2005 it closed a share exchange to buy River Capital Holdings Limited, a Barbados insurance holding company that had never conducted operations. The company issued 19,135,820 shares, said it was no longer a shell, and planned reinsurance. Howard Taylor stayed as director and CEO.

At the end of 2006 the company settled the 2005 and 2006 convertible notes with the Longview funds by issuing 11,045,474 shares at $0.05, and released the security. It also issued 925,000 shares on a warrant exercise, with the funds paying $46,250 in cash. Both steps added many shares for existing holders.

2007-2008: Sonterra and the Texas coast

In August 2007 the company agreed with Longview, then holding about 66.6% of its stock, to buy Sonterra Resources, Inc., an oil and gas business. The deal closed on February 14, 2008. The existing 38,552,749 shares were combined 1-for-10 into 3,855,275, the company was renamed Sonterra Resources, and Longview received 21,846,558 shares, a warrant and a $2,000,000 senior secured note. Former Sonterra holders then owned 95.8% of the stock. The reinsurance effort was described as abandoned, and the records do not say what became of the insurance subsidiaries.

The business centred on Matagorda Bay, Texas. Longview kept funding it, adding a $1,000,000 note in May 2008, but in the same month it had to waive a default after one of two wells was shut in and the company missed its reserve and coverage tests. In June 2008 South Texas Oil Company became contract operator, and Donald Vandenberg, Gary Lancaster and Donald Sebastian took over as officers.

2008-2009: Restructured debt and drilling rigs

On November 13, 2008 the company restructured its debt. Longview gave up its $3,000,000 of senior notes and warrants for a $2,210,550.92 subordinated note and $1,000,000 in cash. Marquis, a Longview-affiliated fund, took North Texas Drilling Services, Inc. (three drilling rigs) in exchange for a $9,440,000 subordinated note and a warrant, and also bought a new $8,875,000 senior note at 13%, maturing November 2011, with repayments starting in August 2009. Its first lien covered substantially all assets.

In December 2008 the first drilling results arrived: State Tract 127-1 reached 12,464 feet with gas and oil pay zones, and the 150-1 sidetrack tested 785 MCF a day of gas. Production was expected in January 2009, but later results were not reported. The auditor resigned the same month, with no disagreements reported.

In July 2009 the Longview restructuring was formalised: Longview swapped 20,000,000 common shares, retired, for 20,000,000 Series A convertible preferred shares valued at $1.20 each.

2009-2010: West Virginia and deregistration

In April 2009 the company signed a letter of intent to buy more than 100 West Virginia gas wells from Classic Oil & Gas Resources for about $5 million. It prepaid $2,000,000 on the senior note in March, cutting principal by $2,192,500. In June Marquis paid $1,500,000 for the acquisition, lifting that note to $6,647,126.98.

The deal closed on October 2, 2009, on smaller terms: 91 wells producing over 2,000 Mcf a day on about 13,500 acres, for about $1.2 million, half at closing and the balance a year later. It included a farmout of 60 drilling locations and a $584,823.50 note to Classic. The company estimated over 10,000 MMcf net of reserves.

The last entry, on August 9, 2010, records that Velocity Energy deregistered its securities, ending its obligation to file reports with the SEC.

Written from the 17 story beats below (2005 to 9 Aug 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

9 Aug
Velocity Energy Inc. deregistered its securities, ending its obligation to file reports with the SEC.
listing compliance notice

2009

9 Oct
The West Virginia deal with Classic Oil & Gas Resources closed October 2, 2009, but on smaller terms than the April letter: 91 gas wells producing over 2,000 Mcf/d across about 13,500 acres for about $1.2 million (50% at closing, balance due one year later), versus more than 100 wells for about $5 million. The company also gets a farmout to develop 60 drilling locations and the right to join over 40 more wells; Classic's reserve report shows 35,000 MMcf gross proved, and the company estimates over 10,000 MMcf net. The senior lender agreed to subordinate its interest in the Classic properties, and Marquis and Summerview received a 3% overriding royalty on them (2.3948% and 0.6052%). A $584,823.50 note went to Classic.
asset acquisition disposition
29 July
On July 27, 2009 the company and Longview signed a share exchange agreement, effective November 1, 2008, formalising the November 2008 restructuring ($1,000,000 payment, $2,210,550.92 subordinated note, cancellation of warrants over 3,000,000 shares). Longview, which held 23,182,876 shares (87.99%), swapped 20,000,000 common shares for 20,000,000 Series A Convertible Preferred shares valued at $1.20 each ($24,000,000), convertible one-for-one into common, with no dividends and no votes except as the designation provides. The 20,000,000 common shares were retired, so common outstanding falls while the preferred can convert back into common. The preferred was not previously in the context; it carries a $1.20 liquidation value ahead of or alongside common holders (inference).
material agreement
22 June
This amendment corrects the June 19 report: the Marquis note increase is $1,644,375 (not $1,664,375) for the $1,500,000 paid, giving a new note of $6,647,126.98. It also adds that on March 31, 2009 the company prepaid $2,000,000 on the senior note, which cut principal by $2,192,500, leaving $6,682,500 on May 29 before the Summerview transfer. The $1,500,000 is to be used solely for an agreed acquisition. Item 2.04 is added to flag the increased obligation.
debt financing
19 June
On June 17, 2009 the company amended the Marquis senior secured note deal: Marquis paid $1,500,000, the note principal rises, and a new note of $6,647,126.98 is to be issued, with the money used only for an agreed acquisition. Earlier, on May 29, 2009, Marquis had transferred $1,679,842.02 of the note to Summerview Marquis Fund, leaving Marquis $5,002,751.98. This adds to the November 2008 senior debt rather than reducing it. The filing's stated increase ($1,664,375) was corrected in the next amendment.
material agreement
17 Apr
On April 13, 2009 the company, through subsidiaries Velocity Energy Partners LP and Velocity Energy Limited LLC, signed a binding letter of intent with Classic Oil & Gas Resources to buy more than 100 producing gas wells in five southern West Virginia counties (about 13,500 acres, 2,500 Mcf/d) for roughly $5 million, targeting a close by May 31, 2009. This is a new line of business in West Virginia, separate from the Texas Matagorda Bay assets. The attached letter shows the price includes about $2.9M base cash, $1.3M in well-location fees and $350,000 for oilfield assets, plus overriding royalties and consulting payments to the sellers, with the buyer assuming a Bank of Mingo loan. The truncated text does not show how the purchase is funded.
material agreement

2008

31 Dec
Akin, Doherty, Klein & Feuge resigned as auditor effective December 29, 2008, only about seven months after being appointed. The filing says its reports had no adverse opinion or going-concern-type qualification and there were no disagreements. The same filing carries a press release saying the State Tract 127-1 well reached 12,464 feet with gas and oil pay zones and is to be brought on line in January 2009, and that the sidetrack well at State Tract 150-1 tested 785 MCF/day of gas and 120 barrels/day of condensate, with production expected in early January. This is the first reported result of the 2008 drilling program.
auditor change
10 Dec
This amendment restates the November 13, 2008 Longview/Marquis transaction report with more detail and full exhibits. It adds that Longview held about 91% of the stock (about 93% with an affiliated fund), that the Senior Secured Note matures November 13, 2011 and starts monthly repayments in August 2009, and that failing certain production and reserve-ratio tests would trigger extra payments and a higher interest rate. It also adds that on December 4, 2008 up to $1,300,000 of the acquisition funds were agreed to be released for a well operated with STO Operating Company ($927,346 released December 8), with a new overriding royalty to Marquis of 7% on that well, falling to 3% once Marquis receives $250,000.
asset acquisition disposition
20 Nov
On November 13, 2008 Sonterra restructured its debt with Longview and an affiliated fund, Longview Marquis Master Fund (Marquis). Longview gave up the $3,000,000 of senior secured notes (the Feb and May 2008 notes) and warrants over 3,000,000 shares. In return it received a $2,210,550.92 unsecured subordinated note and $1,000,000 in cash. Marquis received a $9,440,000 subordinated note and a 1,000,000-share warrant at $0.01, in exchange for North Texas Drilling Services, Inc. (three onshore drilling rigs) and a $8,575,000 note on it. Marquis also bought a new $8,875,000 senior secured note at 13% (for $8,075,000), with a 1,050,000-share warrant at $0.01 and a 3% overriding royalty on the company's oil and gas properties. The new senior note is secured on substantially all assets and matures 36 months after closing; the subordinated notes can be partly repaid in shares at $4.00. This replaces the Longview facility from the earlier context, adds debt and warrants ahead of or alongside existing shareholders, and brings in a drilling business.
asset acquisition disposition
23 July
Effective June 23, 2008, Sonterra appointed South Texas Oil Company as contract operator of its Matagorda Bay properties in Texas state waters, and ended an April 2008 agreement under which Sonterra had operated South Texas's properties in central Texas, south Texas and Colorado. Pawelek, Psencik and Spurlock resigned as officers of Sonterra and became officers of South Texas; Donald Vandenberg (CEO/President), Gary Lancaster (VP and Chief Legal Officer) and Donald Sebastian (VP and CFO) replaced them. The filing says a well (ST 127 Unit Well No. 1) is being drilled below 5,000 feet under the new agreement, which follows up the Q2 2008 drilling plan.
material agreement termination
29 May
On May 22, 2008 the company issued Longview a $1,000,000 senior secured note due August 31, 2010, at three-month LIBOR plus 8.25% and secured by a first-priority lien on substantially all assets. With the $2,000,000 initial note, $3,000,000 of the $10,000,000 facility has been issued, which continues the Longview funding and adds debt ranking ahead of shareholders.
material agreement
20 May
On May 15, 2008 Longview waived a default on the $2,000,000 senior secured note. One of two operating wells was shut in and other factors meant December 31, 2007 results missed the note's reserve and coverage tests, and the company did not make the required partial repayment. Longview also loosened certain covenant measures through December 31, 2008, saying the company would otherwise have failed the same tests at March 31, 2008. This shows the company relies on its main lender's waivers.
material agreement
14 Feb
On February 14, 2008 the Sonterra exchange with Longview closed: the 38,552,749 existing shares were combined 1-for-10 into 3,855,275, the company was renamed Sonterra Resources, Inc., and Longview received 21,846,558 shares and a warrant over 4,958,678 shares (post-split) plus a $2,000,000 senior secured note in exchange for its Old Sonterra holdings and note. The company now operates the Texas Gulf Coast (Matagorda Bay) oil and gas properties through Old Sonterra, and former Old Sonterra holders own 95.8% of the stock, so earlier holders are heavily diluted. This resolves the August 2007 agreement; the filing describes the reinsurance effort as abandoned, and the extract shown does not address the insurance subsidiaries' divestiture.
business combination

2007

9 Aug
On August 3, 2007 the company agreed with Longview (holder of about 66.6% of its stock) to acquire Sonterra Resources, Inc., an oil and gas business that had just bought assets from Cinco Natural Resources and has a pending purchase from Flash Gas & Oil Southwest. Longview would receive 218,465,578 shares (intended as 85% of the stock, before a 1-for-5 to 1-for-20 reverse split) plus a warrant, lifting its stake to about 90%. The company would also have a right to borrow up to $10,000,000 from Longview in secured notes at 3-month Libor plus 8.25% due August 31, 2010. It must divest the insurance subsidiaries as soon as practicable, with Sonterra's executives to become its CEO, VP-Operations and CFO. This moves the company from reinsurance into oil and gas and heavily dilutes other shareholders.
capital raising announcement
8 Jan
On December 31, 2006 the company settled all principal and interest on the 2005 and 2006 convertible notes with the Longview funds by issuing 11,045,474 shares at $0.05, and released the security interests. It also issued 925,000 shares at $0.05 for warrant exercise, with the funds paying $46,250 in cash. This resolves the note financing but adds a large number of shares to existing holders' dilution.
capital raising announcement

2006

6 Jan
On December 30, 2005 the company closed a share exchange to acquire 100% of River Capital Holdings Limited, a Barbados insurance holding company that the filing says has never conducted operations, issuing 19,135,820 shares to its shareholders (including Strategy International Insurance Group and the Longview funds). The company says it is no longer a shell, plans reinsurance through River Reinsurance Limited, and relies on an informal, not yet definitive, agreement with Strategy. Directors William Dickie and Eric Pinkney resigned, while Howard Taylor stays as director and CEO.
business combination

2005

7 June
On May 31, 2005 the company agreed to sell up to $200,000 of secured convertible notes plus five-year warrants for 400,000 shares at $0.75 to accredited investors, to fund working capital. The notes run one year, pay the greater of prime plus 4% or 8%, convert at $0.50 a share and are secured on all company assets, so existing shareholders face possible dilution.
capital raising announcement