Bankruptcy in the Oil and Gas Industry · 2019-11-18 · Chapter 7 (trustee runs the estate)...
Transcript of Bankruptcy in the Oil and Gas Industry · 2019-11-18 · Chapter 7 (trustee runs the estate)...
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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West Coast Landmen’s Institute
Oren Haker Michael Sherman
September 24, 2015 • Marina del Rey, California
Bankruptcy in the Oil and Gas Industry
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Management’s Choices
Liquidate
Out of Court Restructuring Bankruptcy
Reorganize (Chapter 11)
Liquidate (Chapter 7)
Oil & Gas Company (E&P, OFS, etc.)
Reorganize
Reduce or reschedule debt payments
Sell Assets or
issue new equity
Reduce or reschedule debt payments
Sell Assets or
issue new equity
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Informal or Out-of-Court Restructurings Disadvantages
Vulture/Distressed Debt Traders Lack of Bargaining Leverage – Costs, Feasibility Loss of Trade Vendor Support Compliance with Securities Laws No Relief from Burdensome Contracts and Unexpired Leases Foreclosure & Self Help Threatening Overhead
Not a Collective Action No Control of Individual Creditors or Equity Holders No Injunctive Powers No Statutory Discharge Interest Continues to Accrue Subject to Involuntary Bankruptcy Difficult to Control Individual Secured Creditors Inability to Bind Dissenting Creditors
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Chapter 11 Reorganization (Including Sales) Advantages
DIP Financing Administrative Expense to Induce Trade Credit Exclusivity – POR “Breathing Spell” POR Override of Dissenting Minorities in Classes of Accepting Creditors Cramdown and Relaxed Absolute Priority Discharge – Fresh Start Court Approval of Actions Reinstatement of Defaulted Debt
Automatic Stay (Scope!) Suspension of Interest Payments Collective Action Single Forum/Jurisdiction/Property Power to Assume or Reject Executory Contracts and Unexpired Leases Use of Collateral Security Avoidance Powers Use, Sale or Lease of Properties (Free and Clear) Retention of Management, Debtor in Possession
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Chapter 11 vs. Chapter 7 Is the going-concern value > liquidation value?
– If yes, then Chapter 11 – If no, then Chapter 7 or wind-down under state
law How do you value your intangible assets? Customer and supply relationships? Employees? Except, Chapter 11 is often used for “managed liquidations” (i.e., not fire sales).
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Players in an Oil and Gas Bankruptcy
Debtor in Possession and Management Lenders/Banks Bondholders Creditors’ Committee(s) Trade and Service Providers Buyers Oil and gas lessors/mineral rights owners Co-working interest owners Production payment counterparties Contract counterparties under JOAs, Farmin/Farmouts Regulators
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Automatic Stay Upon Bankruptcy Filing Statutory injunction automatic upon filing petition. It prevents:
– Actions by creditors against the “debtor”; – Actions by creditors against “property of the
debtor’s estate.”
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Exceptions to the Automatic Stay Criminal proceedings against the debtor (362(b)(1)); Proceedings by governmental units to enforce police or regulatory powers (362(b)(4)) Actions taken by a creditor under nonbankruptcy law to perfect or consolidate rights against the debtor or the estate
– Perfect or continue perfection of an interest in property to the extent that such trustee’s rights and powers are subject to perfection under section 546(b)
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Automatic Stay – Be Careful Not to Violate It! If a counterparty files for bankruptcy protection, you cannot send a letter of termination to the debtor, nor can you send a notice of default and/or demand for payment. You cannot take “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Automatic Stay – Be Careful Not to Violate It! (cont’d)
Drafting Tip. Include in any correspondence w/ Debtor: “Nothing herein is intended as, nor shall be construed as, an attempt to exercise control over property of the estate or to otherwise violate the automatic stay. This is not a demand for payment or performance, nor an exercise of rights or remedies otherwise available under state law.”
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Cash is King – Especially in Chapter 11!
The Bankruptcy Estate needs to eat.
– Use of cash collateral under section 363 – DIP facility under section 364
Creditors have standing to object to:
– Proposed budget – Granting of liens on oil and gas leases or other
property of estate (including avoidance actions) as adequate protection
– Continued operation of debtor in Chapter 11
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Valuation
Enterprise value determines winners and losers.
It also determines who is driving the bus.
§ § 502, 506
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The Bankruptcy Estate Bankruptcy estate is legal entity separate from the debtor. Chapter 7 (trustee runs the estate)
Chapter 11 (debtor in possession or trustee run the estate)
– Postpetition property is used by the debtor to fund the bankruptcy estate for its reorganization and emergence from bankruptcy, or for its sale of assets.
– Upon confirmation, estate property revests in the
debtor.
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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The Bankruptcy Estate (cont’d)
• Property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case” and includes all proceeds, product, rents or profits of or from property of the estate and any interest in property that the estate acquires after the Petition Date.
• Nonbankruptcy law (i.e., state law) determines whether debtor or creditor has a legal or equitable interest in property and extent of that interest
• Butner v. United States, 440 U.S. 48 (1979) (property interests created and defined by state law).
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Property of the Bankruptcy Estate
What is the nature of the Debtor’s contractual entanglements?
Are prepetition conveyances true sales of real property?
Are they disguised financings?
These answers determine what is property of the estate and the relationship between counterparties (i.e., purchaser versus creditor).
Trustee or DIP Strong Arm Powers – Effects on Unperfected Interests?
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Bankruptcy Issues in Oil and Gas
Mineral Estate
Mineral Interest Owner
ORRIs
PPs Working Interest
Owner/E&P Operator
NPIs
Lease Agreement
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Joint Operating Agreements – Governed by § 365?
• JOAs are uniformly considered to be executory contracts in bankruptcy.
• Prior to assumption, JOA is enforceable by the debtor
and not against the debtor. In re El Paso Refinery L.P., 220 B.R. 37 (Bankr. W.D. Tex. 1998).
• Debtor can assume or reject up until plan. § 365(d)(2). • Nonoperator may request an earlier decision. § 365(d)(4).
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Joint Operating Agreements – Governed by § 365? (cont’d)
• If debtor-operator rejects a JOA, non-operators receive general unsecured claim for damages. § 365(g)(1). Rejection is not akin to termination. Matter of Austin Development Company, 19 F.3d 1077 (5th Cir. 1994)
• If debtor-operator wants to assume JOA, must cure. §
365(b)(1). If debtor wants to sell assets, it should assume and assign, subject to demand for adequate assurance that purchaser has ability to perform.
Bankruptcy in the Oi l and Gas Industry Thursday, September 24, 2015 • Mar ina de l Rey
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Oil and Gas “Leases” – Governed by § 365?
Is an oil and gas lease that conveys a working interest a “lease”? Is the document conveying the interest executory?
Whether the interest conveyed is a vested, freehold real property interest or a leasehold interest (or executory contract) subject to assumption and rejection in bankruptcy is a matter for state law interpretation.
Contractual rights versus vested property rights (and a lot more) hang in the balance.
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Oil and Gas “Leases” – Governed by § 365? (cont’d)
• In Texas, oil and gas “leases” grant the working interest holder “a fee simple determinable” (i.e., a freehold interest) in the minerals. Lessee receives a vested ownership interest in real property.
• Ramifications in bankruptcy? Oil and gas leases governed by Texas law cannot be assumed or rejected.
• Contrary view under Michigan law, in which an oil and gas lease is a lease/license and is governed by section 365 of the Bankruptcy Code.
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Oil and Gas “Leases” – Governed by § 365?(cont’d)
Are oil and gas leases executory contracts? Majority Rule Agreements conveying oil and gas interests are NOT executory contracts, and thus not subject to assumption or rejection by the debtor. However, some courts have held that until oil or gas is produced, no freehold estate vests in the lessee, even if the working interest has been conveyed.
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Treatment of Oil and Gas Property Interests in Bankruptcy: Royalty Interests, ORRIs, and Production Payments
Some states treat “working interests” as real property, but conveyances carved from working interests as personal property that is contractual in nature.
Is the conveyance of the ORRI a true sale or a disguised financing transaction?
Production payments are often referred to as “term ORRIs”. See §541(b)(4)(B) (production payment from E&P debtor to non-operator is not property of the estate)
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Farmout Agreements – Governed by 365? • Written agreement in which owner of a right to drill, produce, or
operate transfers all or part of this right to another entity; and the other entity agrees to perform drilling, reworking, recompleting, testing or related operations on the property. § 101(21A).
• If obligations remain by both parties, debtor may treat such an agreement as executory.
• However, § 541(b)(4)(B) excludes the earned portion of farmout agreement from “property of the estate.” In re ATP Oil & Gas Corp., 2015 Bankr. LEXIS 781 (Bankr. S.D. Tex. 2015). Debtor farmor cannot reject the agreement to invalidate farmee’s right to receive an assignment of its interest.
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Treatment of Contractual Counterparties in Chapter 11 – Creditors’ Tools and Remedies
Bankruptcy claims Reclamation rights 503(b)(9) claims Perfect or maintain perfection of liens Mechanics or Materialmans’ liens Producer liens Compel assumption or rejection Section 541(b)(4) safe harbor Fraudulent transfer and preference litigation
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Endgame in a Chapter 11
• Section 363 Sale(s) & Liquidating Chapter 11 Plan • Confirmed Plan of Reorganization • Section 363 Sale(s) and Conversion to Chapter 7 • Conversion to Chapter 7 • Relief from Stay/Foreclosure
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Contact Information
Stoel Rives LLP 500 Capitol Mall, Suite 1600
Sacramento, CA 95814 (916) 447-0700
Oren Haker [email protected]
Michael Sherman [email protected]