With decreased commodity prices and increasing regulation, the oil and gas industry is undergoing a difficult period of self-reflection in which even the strongest companies are suffering financial distress. These pressures have resulted in a growing number of insolvencies in the oil and gas industry, including in the upstream (exploration and production companies), midstream (transporters and pipeline companies) and downstream (refining and processing) sectors, as well as by providers of services and materials. In this context, it is vital for parties to understand some of the significant issues arising in these bankruptcies, including without limitation the ability to sell (or acquire) assets “free and clear” of liens and the ability to reject burdensome contracts or leases. These issues, along with the difficulties faced by upstream companies in interfacing with regulatory agencies and evolving regulations, was the principal focus of a panel at the LSU Law Center’s 22nd Annual Bankruptcy Law Seminar entitled “Oil and Gas Industry: Dealing in Distressed Assets, Midstream Issues, and Offshore Regulatory Changes.” For more information about this timely topic, please see the attached materials or contact Benjamin Kadden at bkadden@lawla.com.
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Oil and Gas Industry: Dealing with Distressed Assets, Midstream Issues, and Regulatory Changes
1. OIL AND GAS INDUSTRY:
DEALING IN DISTRESS
ASSETS, MIDSTREAM
ISSUES, OFFSHORE
REGULATORY CHANGES.
OCTOBER 2016
NADÈGE A. ASSALÉ, MEMBER, SLATTERY, MARINO &
ROBERTS
CHUCK GIBBS, PARTNER, AKIN GUMP
BENJAMIN KADDEN, SHAREHOLDER, LUGENBUHL,
WHEATON, PECK, RANKIN & HUBBARD
BILL WALLANDER, PARTNER, VINSON & ELKINS
22nd Annual Bankruptcy Law Seminar
October 6-7, 2016
The content of this presentation does not constitute legal advice.
2. DISCUSSION TOPICS
363/Plan Sales
Issues Related to Midstream and Upstream Contracts
Offshore Regulatory Issues
Q&A
Industry Headwinds a/k/a Restructuring Tailwinds
Out-of-Court Acquisitions from Distressed Sellers
This communication is provided for educational and informational purposes only and
is not intended, nor should it be construed, as legal or tax advice. Firm names are not
necessarily the formal legal name.
The content of this presentation does not constitute legal advice.
4. INDUSTRY HEADWINDS A/K/A RESTRUCTURING TAILWINDS
“The number of energy loans labeled as “classified,” or in danger of default, is on course to
extend above 50% this year at several major banks, including Wells Fargo & Co. and Comerica Inc.,
according to bankers and others in the industry.”
Source: The Wall Street Journal, “Coming to the Oil Patch: Bad Loans to Outnumber the Good”
Source: The Wall Street Journal
Select Oil and Gas Bankruptcy Filings of 2016
Filing Date Debtor
7/27/2016 Halcon Resources Corporation
7/27/2016 Atlas Resource Partners, L.P.
6/30/2016 Triangle Petroleum Corporation
6/2/2016 Warren Resources, Inc.
5/16/2016 Breitburn Energy Partners L.P.
5/16/2016 SandRidge Energy, Inc.
5/12/2016 Penn Virginia Corporation
5/11/2016 LINN Energy, LLC
5/9/2016 Chaparral Energy, Inc.
4/30/2016 Midstates Petroleum Company, Inc.
4/29/2016 Ultra Petroleum Corp.
4/15/2016 Goodrich Petroleum Corporation
4/14/2016 Energy XXI Limited
3/27/2016 Southcross Holdings LP
2/14/2016 Paragon Offshore Plc
The content of this presentation does not constitute legal advice.
6. • Benefits
– Faster than bankruptcy sales
– Customary allocation of liabilities and pre- and post-effective time expenses
– General diligence period and adjustment for title and environmental defects, casualty losses, etc.
– No court approval required
• Risks/Downside
– Fraudulent Transfer Risks / Avoidable Preferences
– Acquisition is not “free and clear” of existing liens, claims and encumbrances
– PSA Considerations
o If seller files for bankruptcy after signing but before closing, Buyer may be stuck with a “hanging” PSA that
Seller can reject as an executory contract
o If seller files for bankruptcy after closing, Buyer may be left with unenforceable indemnities and no post-
closing recourse; prepetition unsecured claims against debtor seller
– Must comply with anti-assignment provisions, consent rights and rights of first refusal
OUT-OF-COURT ACQUISITIONS FROM DISTRESSED SELLERS
(PRE-BANKRUPTCY)
The content of this presentation does not constitute legal advice.
7. • Pre-bankruptcy transactions may be avoided as a “fraudulent transfer” or “fraudulent
conveyance”
• Federal and State Look-Back Period
– Federal look-back period: 2 years
– State look-back period: usually longer (TX: 4 years)
• If transaction is determined to be a fraudulent transfer:
– Trustee has the power to (1) recover assets from the Buyer or (2) recover the full value of the
assets from the Buyer (e.g., the value of the assets at the time of transfer less than what was
actually paid)
– Remedies of Buyer
o “Good faith” Buyers are entitled to a lien on the assets to secure the value of any improvements made by the
Buyer after the initial closing
o If Debtor in possession or Trustee recovers the assets, Buyer has a claim for damages/recovery of purchase
price – typically a general unsecured claim
o If PSA has not closed, Buyer can seek return of deposit
‒ Note: Even though assets may be returned to the Debtor in possession or Trustee, Buyer may
remain liable for unavoidable obligations (such as plugging and abandonment, credit support,
environmental obligations, etc.) by virtue of closing the avoided transaction and/or entering the
chain of title
AVOIDANCE OF TRANSACTIONS -- FRAUDULENT TRANSFER
The content of this presentation does not constitute legal advice.
8. • Actual Fraud: Transfers “with actual intent to hinder, delay, or defraud” a creditor
• Constructive Fraud: Debtor received less than a “reasonably equivalent value” and
debtor:
– was insolvent at the time, or as a result of, the transfer;
– made the transfer, or incurred such obligation, to or for the benefit of an insider, under an
employment contract and not in the ordinary course of business;
– was engaged, or was about to engage, in business or a transaction for which any property
remaining with debtor was “unreasonably small capital” (this prong is applicable in TX but not
other states); or
– intended to, or believed that debtor would, incur debts that would be beyond debtor’s ability to pay
such debts as they mature (this prong is applicable in TX but not other states).
• Defense to Constructive Fraud: Transferee acted in “good faith” and the transfer was
“for reasonably equivalent value”
AVOIDANCE OF TRANSACTIONS -- FRAUDULENT TRANSFER (CONT’D)
The content of this presentation does not constitute legal advice.
9. • Possible mechanisms to mitigate risk that seller files for bankruptcy between sign/close:
– Risk that seller rejects PSA
o Consider requiring the payment of an upfront work fee
– Risk of “hung” PSA
o Draft outside date so that the PSA automatically terminates at a certain date unless buyer elects to extend
o No deposit or deposit in escrow
– Risk of auction process
o Consider whether Seller can grant Buyer exclusivity
o If seller (or bankruptcy court) require an auction, require seller to name buyer as the stalking horse
• Possible mechanisms to mitigate risks with seller filing for bankruptcy after closing:
– Risk of fraudulent transfer risks/avoidable preferences
o Include seller reps on solvency; marketing efforts; use of proceeds; and PSA is in good faith and arms-length
o Solvency / fairness opinions
o Include covenants requiring seller to maintain / provide records on marketing efforts
– Risk that seller rejects PSA (i.e., terminates indemnity provisions)
o Require a post-closing escrow or a holdback for indemnity claims
PSA PROTECTIONS
The content of this presentation does not constitute legal advice.
11. 363 SALES TRANSACTIONS
• Stalking horse bidder – bidder that subjects proposal to topping bids and subject to
court approval
– Debtor conducts initial marketing process to find a stalking horse bidder
– Stalking horse PSA is typically executed and attached to initial motion
– Bid protections (1-3% of transaction amount) and expense reimbursement
– Minimum bid increments
– Lenders may be the stalking horse bidder through a credit bid
• 363 Sale PSA
– Highly negotiated
– Effective Date purchase price adjustments
– Treatment of title and environmental matters
– Minimal reps and warranties/burn off
– Closing Conditions
– Limited post-closing recourse
– Key stakeholders and other parties in contest may object to sale
– Subject to court approval
The content of this presentation does not constitute legal advice.
12. 363 SALES TRANSACTIONS (CONT’D)
• Treatment of executory contracts
– Debtors may assume and assign certain contracts to purchaser
– Cure costs
– Assignment limited by applicable law
– Dealing with pref rights
• Auction process
– Additional marketing process to find bidders at the auction
– Determination of qualified offers and court approved bidding procedures to govern process
– Auction conducted
– Winner signs up PSA with debtor, bankruptcy court approves transaction
– Closing / backup bidder
• “Free and clear”
– Interaction with applicable state law, federal law, tribal law
– Oil and gas leases and royalty obligations under state law
• Dealing with debtor's main creditor groups (secured creditors/committees of
unsecured creditors)
The content of this presentation does not constitute legal advice.
13. PLAN SALES
• Process steps for bidding/auction similar to 363 sale
• Plan can be a sale plan or a sale proceeds distribution plan
• Sale under the plan itself (direct asset sale, synthetic sale)
• Sale prior to plan, plan to distribute proceeds
• Direct distributions
• Plan trust distributions/waterfall
• Synthetic sale
• Cancel equity
• Issue new equity to purchaser via 1145 or securities exemption
• Purchased assets vest in reorganized debtor
• Excluded assets vest in liquidating trust
• Can be useful to avoid need to file numerous assignments, consent rights, pref
rights, etc.
The content of this presentation does not constitute legal advice.
14. Issues Related to Midstream and Upstream Contracts
The content of this presentation does not constitute legal advice.
15. • Midstream
• Gathering and Processing Agreements (GPAs)
o Impact of bankruptcy filing / Automatic Stay
o Rejection / Assumption of GPAs
o Dedications and volume commitments
o Covenants running with the land
o Recent cases
• Sabine, where the arcane journey began
• Quicksilver, rejection vs sales
• Magnum Hunter, rejection of a schedule…process
• Emerald Oil, 100% co-dependency
• Upstream
• Joint Operating Agreements
o Removal of operator
o Impact on continuing operations
o Advanced funds, JIBs and production revenue
o Non-consent penalties
o Covenants running with the land
o JOA lien, lien priority and default provisions
o Consent and pref rights
KEY CONTRACTS/ISSUES
The content of this presentation does not constitute legal advice.
16. REGULATORY UPDATE ON FINANCIAL ASSURANCE FOR
DECOMMISSIONNG LEASE OBLIGATIONS ON THE OUTER
CONTINENTAL SHELF
The content of this presentation does not constitute legal advice.
17. The content of this presentation does not constitute legal advice.
18. • Outer Continental Shelf Land Act 43 U.S.C. § 1301
– Defines BOEM’s jurisdiction and regulatory responsibility over the submerged lands of the OCS
• 30 CFR § 556, Subpart I
– General Financial Assurance Requirements
o No operation: $50,000 per lease or $300,000 areawide
o Exploration: $200,000 per lease or $1,000,000 areawide
o Development: $500,000 per lease or $3,000,000 areawide
o Pipeline Rights-of-Way: $300,000 areawide [30 CFR § 550.1011]
– Supplemental Financial Assurance Requirements
o Discretionary
o 30 CFR § 556.901(d-f) provides that the Regional Director has the authority to determine the amount of
supplemental financial assurance required to guarantee compliance, taking into consideration potential
underpayment of rents and royalty, and cumulative obligations to abandon wells, remove platforms and facilities,
and clear the seafloor of obstructions in case-specific analysis
• Notice to Lessees and Operators NTL No. 2016-N01
– Issued July 14, 2016, effective September 12, 2016
– Provides clarification and description of the scope and meaning of the regulation based on the DOI’s
interpretation of same; provides guidelines on BOEM’s implementation of the updated financial
assurance police
PRINCIPAL REGULATORY SOURCES REGARDING BOEM’S FINANCIAL
ASSURANCE REQUIREMENTS
The content of this presentation does not constitute legal advice.
19. SUMMARY OF KEY POLICY CHANGES
2008 Policy 2016 Policy
Co-Lessee Reliance Yes No
Redundant Securities Yes No
Premature Demands Yes No
Decommissioning Cost
Estimate Models
- Updated August 2016
Forms of Financial
Assurance
- Expanded
Assets Impacted - Expanded (ROWs + ORI
owners and operators)
Joint and Several Liability Yes Yes
Waiver/Self-Insurance Yes – all or nothing and
for select few only
Yes – capped to 10% of
TNW and available to all*
Tailored Plans Maybe Yes
The content of this presentation does not constitute legal advice.
20. CRITERIA
Same as before, per regulation at 30 CFR § 556.901(d)(1); different application, however
• Financial Capacity
• Projected Financial Strength
• Business Stability
• Reliability
• Record of Compliance
TANGIBLE NET WORTH
• Total Assets – Total Liabilities – Intangible Assets
SELF-INSURANCE ASSESSMENT CRITERIA
Total Assets
Cash and cash equivalents
Investments
Real property
Total Liabilities
Secured liabilities - Debt backed
or secured by collateral to reduce
the risk associated with lending
Unsecured liabilities – debt or
general obligation that is not
collateralized
Intangible Assets
Goodwill
Patents
Trademarks
Intellectual property
Other IP
The content of this presentation does not constitute legal advice.
21. CONT’D
• Financial Capacity
– Substantially in excess of existing and anticipated lease and other obligations; Assessed through
most recent (not more than 12 months old) audited financial statements;
– (Not interested in the absolute size of the ratio but in its relative size, compared to the same ratio of
the industry
– Benchmark ratios updated yearly (no later than September 1) to reflect market conditions. They are
built using a 5-year moving average
– Need to pass 5 of the above 9 ratios to be eligible for initial self-insurance
E.g. of Applicable Financial Ratios 2011-2015 Industry Averages
Cash Flow from Operations / Total Debt at or above 0.20
Current Ratio at or above 1.07
Earnings Before Interest & Taxes / Interest Expense at or above 4.78
Quick Ratio at or above 0.97
Return on Assets at or above -2.56%
Return on Equity at or above 0.18%
Total Debt / Capital at or below 0.57
Total Debt / Earnings Before Interest, Taxes, Depreciation and
Amortization
at or below 4.35
Total Debt / Equity at or below 1.25
The content of this presentation does not constitute legal advice.
22. CONT’D
• Projected Financial Strength
– The estimated value of existing OCS lease production and proven reserves of future production.
o Proved Developing Producing (PDP) reserves valued using the SEC’s PV10 or Fair Market Value method
o BOEM may add up to 25 percent of the PV10 value of PDP Reserves to the amount of Tangible Net Worth,
hence increasing the base to which the percent of self-insurance is applied.
• Business Stability
– 5 years of continuous operation and production on the OCS or onshore.
• Reliability
– Credit rating from Moody’s or Standard and Poor’s, or trade references
o Investment Grade “Bond Rating” to obtain self-insurance. Investment Grade is Moody’s Baa3 or S&P BBB-.
The minimum credit rating to be allowed to apply self-insurance to sole liability properties is A3 (Moody’s) or A-
(Standard and Poor’s)
o Self-Insurance Increase of up to 5% of tangible net worth if > A2/A; up to 2% if =or>Baa3/BBB-; no increase for
Ba1/BB+; any rating <Ba1/BB+ may result in negative adjustment [-1% for Ba2/BB- to -5% for B3/B-]
• Record of Compliance
– Civil penalties; Incidences of Non-compliance (“INCs”); Citations by any other agency(ies) with
jurisdiction on the OCS; Citations for non-payment or under-payment of rentals, royalties, interest
bills, civil penalties, or inspection fees, referred to the U.S. Treasury for collection within the past 5
years.
The content of this presentation does not constitute legal advice.
23. TAILORED PLANS
• Formal agreement to be filed and approved by BOEM for any type of financial
assurance other than surety bond(s) or Treasury security(ies) used to meet
supplemental security requirement, or for requests to phase-in such provision
– Encourages creativity
– Should be as detailed as the arrangement and forms of security proposed allow, and identify any
properties to be covered by others’ self-insurance (e.g. co-lessees’, operating rights owners,
and/or co-owners of ROWs or RUEs)
– BOEM will not hold annual meetings but will conduct annual reviews for financial ability
evaluation. Upon receipt of BOEM’s evaluation result, a company can request a meeting with
BOEM to discuss. A demand letter can be sent within 60 days after BOEM conducts the annual
review. Audited financials to be submitted to BOEM by July 1 as before (extensions can be
granted for companies with fiscal years ending on a date other than December 31). Note that
other events can prompt a review (e.g. assignments, news reports)
The content of this presentation does not constitute legal advice.
24. PHASED-IN TIMETABLE FOR NTL 2016-N01 COMPLIANCE
The content of this presentation does not constitute legal advice.
25. KEY ISSUES
1) Potential issues between creditors; debtors/trustees; JV partners; and Government as to access of
the funds in the DTA/escrow to perform the actual decommissioning work
From a federal regulatory perspective, decommissioning obligations accrue when a well is drilled, a
platform, pipeline or other facility is installed, or when an entity “becomes a lessee or owner of operating
rights of a lease on which there is a well that has not been permanently plugged according to this
subpart, a platform, a lease term pipeline, or other facility.” 30 C.F.R. § 250.1702. Clearly, performance
and accrual of the obligation are two separate concepts. As a result, claims for accrued obligations that
have not been performed are merely “contingent administrative claims” at the time of the bankruptcy
filing.
2) Contractual JOA issues as already discussed
3) ??
The content of this presentation does not constitute legal advice.
26. OIL AND GAS INDUSTRY ISSUES
Q&A
The content of this presentation does not constitute legal advice.