“Workouts and Bankruptcies in the Oil & Gas Industry – What You Should Know”

Presented by:

Elizabeth K. Brown Melvin R. McVay, Jr.

Stephen W. Elliott Clayton D. Ketter

This is an expanded version of the PowerPoint presented on June 12 at the 2016 OIPA Annual Meeting. Between slides are notes from a panel discussion with Phillips Murrah P.C attorneys:

• Melvin R. McVay Jr.

• Stephen W. Elliott

• Elizabeth K. Brown

• Clayton D. Ketter

Biographical information and links to attorneys’ profiles can be viewed at http://phillipsmurrah.com/oklahoma-bankruptcy-panel-download.

Disclaimer

This presentation is an educational tool that is general in nature and for purposes of illustration only. The materials in this presentation do not constitute legal advice and are not a substitute for consulting with legal counsel. If legal advice or other expert assistance is required, the services of a competent professional should be immediately sought.

Oil and Gas Bankruptcies on the rise

Source: CNN Money, http://money.cnn.com/2016/02/11/investing/oil-prices-bankruptcies-spike/

Oil and Gas Bankruptcies – Debt through mid-May 2016

Source: Haynes and Boone, LLP Oil Patch Bankruptcy Monitor

Workouts

Bankruptcy is frequently the last resort for both borrowers and lenders. A workout is generally preferable.

A workout is an attempt by a debtor and its creditors to address the financial problems, and other issues identified, in order to reach a mutual agreement so litigation and bankruptcy can be avoided.

• A workout is, essentially, a process to renegotiate the terms of the debt, which is often in default.

• A workout is a consensual agreement between creditors and the borrower, so it inherently has its limitations.

Workouts - Bankruptcy in the Background It is important to analyze the situation first, before beginning a workout negotiation, to determine what would likely happen in a bankruptcy and to be able to demonstrate the advantages the workout would have for all parties.

Typical Advantages of a Workout: • Given the reduced costs and speed, avoid the cost of bankruptcy.

• Avoid public disclosure, scrutiny and the stigma of the bankruptcy process.

• Reduce adverse impact on employee morale.

• More money may be available to use to stabilize the business and pay creditors’ claims.

Disadvantages of a Workout: • No ability to involuntarily bind a creditor who may not want to enter into the workout.

• Delay.

• May have adverse tax consequences.

• May be more difficult or impossible to take advantage of certain securities exemptions.

Workouts Re-negotiation of debt is part and parcel of the workout agreement.

Generally speaking, both parties want to have as much control over the outcome as possible, and an out-of-court workout allows them to do that, as opposed to bankruptcy court, where there can be a lot of uncertainty.

Debt Restructuring In a workout, the borrower seeks some relief from the debt service burden, which may include:

• Forbearance.

• Extension of the payments.

• Re-negotiation of the terms of the loan, e.g., interest rate amortization period, payment dates, or other terms and conditions.

• Partial payment arrangements under which debt is forgiven.

Workouts

Forbearance agreement: The lender will typically require the debtor to:

• Acknowledge the amount of the debt.

• Sign a general release of any and all claims the debtor has against the creditor.

• Provide additional collateral in certain instances.

The Key to any Workout: Be proactive. Don’t wait until the last minute when your options may have been reduced substantially.

Two options for Business Bankruptcy

Chapter 7 - Liquidation Chapter 11 - Reorganization

• Trustee appointed to liquidate property for the benefit of unsecured creditors.

• Debtor usually remains in possession of properties and management stays in place (debtor-in-possession).

• Business typically ceases. • Goal is to preserve or enhance the value of the business and its assets.

• Court supervision, liquidation of assets and distribution of proceeds.

• Court supervised reorganization, which may yield an ongoing, reorganized debtor or a value-enhancing liquidation.

• Debt is not restructured. • Once a court-approved plan becomes effective, further court supervision is generally reduced or eliminated.

• Distribution hierarchy determined by statute.

Chapter 11 Plans In Chapter 11, a written disclosure statement and a plan of reorganization must be filed with the court. The debtor, assuming it remains as a "debtor in possession," operates the business and performs many of the functions that a trustee performs in cases under other chapters.

Possible Provisions: a. Restructuring secured debt.

b. Cancelling unsecured debt.

c. Selling assets.

d. Cancelling equity.

Frequently pays a small fraction of prepetition unsecured claims, which are unsecured liabilities that arose prior to a company filing bankruptcy.

Automatic Stay

The automatic stay acts to prevent collection or pre-petition claims in forums other than the bankruptcy court, helps preserve going-concern value of the debtor and ensures equality of distribution for similarly situated creditors.

a. Comes into effect immediately upon a bankruptcy filing without a need for a court order.

b. Prohibits collection action against the debtor and its property.

Prevents:

i. Creditors from demanding payment.

ii. Filing or continuing litigation.

iii. Foreclosing on property.

iv. Repossessing collateral.

c. Doesn't prevent actions against guarantors.

d. Can be lifted on motion to the bankruptcy court.

Executory Contracts and Unexpired Leases

a. Debtor has option to accept or reject executory contracts

i. Acceptance requires curing of defaults.

ii. Rejection will entitle counterparty to a claim for damages.

b. Oklahoma oil & gas leases are not executory or unexpired for purposes of assumption or rejection (treatment may differ state by state).

c. Likely executory contracts

i. Joint Operating Agreements.

ii. Unitization Agreements.

d. Not subject to acceptance or rejection

i. Farmout Agreements.

ii. Swap Agreements.

iii. Production Payments.

iv. Plugging Obligations.

Protecting Interest in Bankruptcy There are certain actions creditors can take to increase the likelihood of recovery:

a. File proof of claim timely – May waive jury trial right.

b. Avoidance actions

i. Preference – Generally covers payments received 90 days before bankruptcy filing.

ii. Fraudulent Transfer – Generally covers transfers made for less than reasonably equivalent.

iii. Transactions should be structured value to lessen chance of an avoidance action.

c. Lien rights

i. Oil and Gas Owners' Lien Act of 2010

ii. M&M Liens

iii. Contractual Lien Rights

Pre-Bankruptcy Protections

If you know of someone you’re doing business with is having financial difficulties, it is a good practice to review your contracts with them and make sure you know what your position is and, if needed, to improve your position.

a. Execute Assignments.

b. Record Interests.

c. Obtain Prepayments.

d. Get Personal Guaranties.

e. Get Deposits.

Opportunities Presented

Companies that are going through the process of resolving financial stress are often looking liquidate some assets. That may create acquisition opportunities.

a. Acquisition of assets.

b. Protections of Bankruptcy Code Section 363 – When assets are sold through the bankruptcy process, known as a 363 sale it is frequently a quick, clean transfer, free of claims, interests & liens.

c. Stalking horse / auction – While selling assets, the seller may select an interested buyer to make an initial bid, which is a way to insure there is a ready, willing and able buyer, and kick off a competitive bidding process. The stalking horse sets the minimum bid and the other parties are given an option to outbid the stalking horse. If another party wins in the bidding process, the stalking horse typically gets a breakup fee.

d. Secured creditor’s ability to credit bid.

Disclaimer

This presentation is an educational tool that is general in nature and for purposes of illustration only. The materials in this presentation do not constitute legal advice and are not a substitute for consulting with legal counsel. If legal advice or other expert assistance is required, the services of a competent professional should be immediately sought.

“Workouts and Bankruptcies in the Oil & Gas Industry – What You Should Know”

Presented by:

Elizabeth K. Brown Melvin R. McVay, Jr.

Stephen W. Elliott Clayton D. Ketter