“Workouts and Bankruptcies in the Oil & Gas - PowerPoint Presentation

Slide1

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

Presented by:

Elizabeth K. Brown

Melvin R. McVay, Jr.

Stephen W. Elliott

Clayton D. KetterSlide2

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

B

iographical

information and links to

attorneys’

profiles can be

viewed at

http://phillipsmurrah.com/oklahoma-bankruptcy-panel-download

.Slide3

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.Slide4

Oil and Gas Bankruptcies on the rise

Source

: CNN Money, http://money.cnn.com/2016/02/11/investing/oil-prices-bankruptcies-spike/Slide5

Oil

and Gas Bankruptcies – Debt through mid-May 2016

Source

: Haynes and Boone, LLP Oil Patch Bankruptcy MonitorSlide6

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.Slide7

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.Slide8

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 RestructuringIn 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.Slide9

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.Slide10

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 p

reserve 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

c

ourt-approved plan becomes effective, further court supervision is generally reduced or eliminated.

Distribution hierarchy determined by statute. Slide11

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:Restructuring secured debt.Cancelling

unsecured

debt.

Selling

assets.

Cancelling

equity.

Frequently pays

a

small fraction

of prepetition

unsecured claims

, which

are unsecured liabilities

that

arose

prior to a company filing

bankruptcy.Slide12

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.Comes into effect immediately upon a bankruptcy filing without a need for a court order.Prohibits collection action against the

debtor and its property.

Prevents

:

Creditors

from demanding

payment.

Filing

or

continuing

litigation.

Foreclosing

on

property.

Repossessing

collateral.

Doesn't

prevent actions against

guarantors.

Can

be lifted on motion

to the bankruptcy court.Slide13

Executory

Contracts and Unexpired Leases

Debtor

has option to accept or reject executory contracts

Acceptance

requires curing of defaults.Rejection will entitle counterparty to a claim for damages.Oklahoma oil &

gas

leases

are not

executory or unexpired for purposes of assumption or rejection (treatment may differ state by

state

).

Likely

e

xecutory

c

ontracts

Joint Operating

Agreements.

Unitization

Agreements.

Not

s

ubject

to

acceptance

or

rejection

Farmout

Agreements.

Swap

Agreements.

Production Payments.

Plugging Obligations.Slide14

Protecting Interest in Bankruptcy

There are certain actions creditors can take to increase the likelihood of recovery:

File

proof

of

claim timely – May waive jury trial right.Avoidance actionsPreference – Generally covers payments received 90 days before bankruptcy filing.Fraudulent Transfer – Generally covers transfers made for less than reasonably equivalent.

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

Lien

r

ights

i. Oil and Gas Owners' Lien Act of 2010

ii. M&M Liens

iii. Contractual Lien RightsSlide15

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. Execute Assignments.Record Interests.Obtain Prepayments.

Get Personal

Guaranties.

Get Deposits.Slide16

Opportunities Presented

Companies that are going through the process of resolving financial stress are often looking liquidate some

assets.

That may create

acquisition opportunities.

Acquisition of assets.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.

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 s

talking

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.

Secured creditor’s ability

to credit

bid.Slide17

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.Slide18

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

Presented by:

Elizabeth K. Brown

Melvin R. McVay, Jr.

Stephen W. Elliott

Clayton D. Ketter