By the time Lilis Energy Inc. decided to enter the Delaware Basin—which was swiftly becoming the hottest A&D market in the U.S.—the small Denver company was essentially drawing its last breath.

“We were going to be just one of those statistics that filed for bankruptcy,” said CEO Avi Mirman, recalling plainly that the atmosphere was, “We’re finished.”

Looking for a lifeline, Mirman decided to reach out for an anchor chain. But the company that he thought might lead Lilis back into the black—Brushy Resources—happ-ened to be teetering on bankruptcy itself.

Distressed sales happen frequently during downturns. What Mirman conceived was a combination of two snake-bitten E&Ps into a single, viable company.

Lilis, like Brushy, had been hammered by low commodity prices. In December 2015, Lilis received notice it would be delisted from NASDAQ. At one point, the stock price fell to $0.08 per share. During a four-month span, Lilis employees did not take home paychecks.

Brushy was worse off. It owed $33 million in debt backstopped with about $6 million in proved developed producing PV-10 value.
“They were just sitting ducks out in the water,” Mirman said.

But Brushy had a single advantage. It was located in the luxury suite of U.S. shale plays—the southern Delaware Basin. Brushy’s holdings included 3,458 net acres in Winkler County, Texas, in the southern Delaware. Last January, two Permian deals averaged about $18,000 per acre. That price would only escalate as more and more companies snatched up private E&Ps’ acreage.

Acquiring Brushy would cost just $4,100 per acre—roughly 90% off average acreage prices at the end of 2016.

Mirman approached Brushy with two scenarios. In one, Brushy would sell its assets through Chapter 11 bankruptcy proceedings. That would wipe out its subordinated lenders, equity shareholders and pay off some of its bank debt.

“Alternatively, you can sweat it out,” Mirman said, recounting his pitch. “We can enter into a definitive agreement to merge. We can distribute stock to your shareholders so they have an opportunity to either recover or do better than they have previously done.”

In January 2016, Lilis announced it would merge with the small San Antonio-based E&P, Brushy Resources.

Mirman is, by trade, a banker not well-versed in technology or geology. But what he saw was a deal to get Brushy and Lilis on the right track amidst a dynamic upturn in Permian values.

“Looking at A&D activity, acquiring Delaware acreage at $4,100 per acre and $30,000 per flowing barrel was well below industry trends,” he said.

And if things went poorly, Lilis could always flip the asset for, hopefully, a good return.

By June 2016, Lilis executed an offering of preferred stock—a move that perhaps few, if any, microcap companies had pulled off.

“We closed on $20 million in financing, preferred stock,” Mirman said, adding that Canadian institutional investors and U.S. investors also helped to recapitalize and restructure the business. Most of the debt on Brushy’s balance sheet has been eliminated since.

“We were off to the races,” he said.

Mirman said the successful offering was a defining moment for him.

“It was the most triumphant event of not only my career, but of my life,” he said. “And the five months preceding that were the most miserable months. We just kept teetering and teetering and teetering.”

One question still remained, naturally, about the value of the acreage—an old gas field—in which the company planned to reenter vertical wellbores and drill horizontally.

The company has a sense it would do well in the market. Since the merger, Lilis has increased its acreage profile to 5,600 Delaware acres—mostly in bite-sized increments. On Oct. 13, Lilis purchased about 640 gross acres from a company in bankruptcy for about $3 million—less than $5,000 per acre, excluding production.

The same day, Lilis’ next-door neighbor, Silver Hill Energy Partners LLC, was purchased by RSP Permian Inc. for about $2.4 billion—$47,000 per acre.

“That was a massive win for us,” Mirman said. “Overnight, Lilis’ purchase of 640 acres recognized a $20 million uplift in value for us, based on the Silver Hill acquisition metrics.”

The Brushy merger might not have made sense to larger E&Ps.

“I don’t know that a huge company is going to spend the kind of time and effort required to just work on a tiny acquisition of 3,450 net acres,” he said. “But for us it made a great sense.”

As Lilis sets its sites on building a 10,000-acre position, every acquisition moves the needle—even the small, distressed ones.

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