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Presenting a live 90-minute webinar with interactive Q&A

Oil and Gas E&P Restructurings and

Bankruptcies: Navigating the Unique Issues

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, DECEMBER 9, 2015

H. Joseph Acosta, Partner, FisherBroyles, Dallas

William R. Greendyke, Partner, Norton Rose Fulbright, Houston

Louis R. Strubeck, Jr., Global Head, Financial Restructuring and Insolvency,

Norton Rose Fulbright, Dallas

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Oil and Gas E&P Restructurings and Bankruptcies

December 9, 2015

Louis R. Strubeck H. Joseph Acosta

Norton Rose Fulbright US, LLP FisherBroyles, LLP

William R. Greendyke

Norton Rose Fulbright US, LLP

Why are we here?

• Low prices = low cash flow

• Belt tightening across the country = low cash flow

• RBL borrowing base redeterminations

-- Reserves establish the borrowing base of the loan

-- A lender providing a RBL will make its own calculation of collateral value when determining the borrowing base at each redetermination date

• Covenant challenges / defaults in loan facilities

• Significant roll off of hedges, which will begin accelerating at year end

• Vendor issues

• Customer issues

• Litigation

* The Result: Current commodity prices have placed a severe strain on both oilfield service companies and E&P companies.

6

The Largest 2015 Energy Related Chapter 11 Filings

Company: Result:

• WBH Energy LP (WDTX) Sale

• CalDive International (DE) Sale

• Dune Energy (WDTX) Sale

• BPZ Resources (SDTX) Sale

• Hercules Offshore (DE) Reorganization

• RAAM Global Energy (SDTX) Reorganization

• Miller Energy Resources (AK) Reorganization

• Black Elk Offshore (SDTX) Sale / Liquidation

• Sabine Oil & Gas (SDNY) Reorganization

• Milagro Oil & Gas (DE) Sale

• Luca International Group LLC (SDTX) Sale

• ERG Resources (NDTX) Failed Sale / Reorganization

• Quicksilver Resources (DE) Sale

• Saratoga Resources (LA) ???

• Samson Resources (DE) Reorganization

• Parallel Energy LP (DE) Sale

7

How long will it last?

* Houston Business Journal, Oct. 9-15, 2015

8

Current Market Trends

• General consensus that commodity prices will stay low for a lengthy period of time.

* Source: World Bank Commodity Forecast Price Data, Oct. 2015

• Regulators are increasing pressure on energy lenders (write downs).

• Companies have looked to alternative lenders / second lien debt.

9

Current Market Trends

• Rig counts are substantially lower than last year resulting in excess capacity (supply v. demand).

* Source: http://www.wtrg.com/rotaryrigs.html

• Lower rig count = more competition = lower profit margins = less jobs.

• Equipment values are depressed given excess in market.

10

So what do we do?

• Out of court . . . -- rework lending facilities / indentures

-- forbearance agreements

-- recapitalize

-- exchange offers

• In court . . . -- chapter 7 or chapter 11

-- voluntary or involuntary

-- state law remedies (i.e., litigation, receivers, injunctions, etc.)

11

Primary Goals and Benefits of Bankruptcy

• Temporary relief from creditors via the “automatic stay”

-- One of the most fundamental protections

-- It is a statutory injunction imposed immediately upon the commencement of a bankruptcy case

-- Provides a debtor with a breathing spell from its creditors (i.e., all collection action must cease)

-- Actions taken in violation of stay are punishable by contempt of court

• Give the debtor a fresh start . . . and hopefully reorganize

• Treat similarly situated creditors equally in accordance with bankruptcy priority scheme (i.e., equitable distribution):

-- Secured creditors get value of collateral

-- Unencumbered assets divided by priority:

* First, administrative expenses

* Second, statutory priority (i.e., the IRS)

* Third, general unsecured creditors

* Last, equity interests

12

Key Players in Energy Bankruptcies • The Bankruptcy Judge

• The Debtor (incl. its legal and financial advisors)

• Creditors’ Committee (incl. its legal and financial advisors)

• U.S. Trustee

• Chapter 7 Trustee

• Chapter 11 Trustee / Examiner

• Lender(s)

-- institutional?

-- secured?

-- bonds?

• Other secured creditors?

• Counterparties (derivative / contract)

• Trade creditors / vendors / customers

• Employees

• Governmental / regulatory agencies

• Potential buyers / investors

• Equity holders

13

Chapter 11 Basics

• Case commences

• Automatic stay

• First day orders (wages, critical vendors)

• Cash collateral / DIP financing (fund the process)

• Sale of assets?

• Plan of reorganization or . . . liquidation?

• Lien issues (perfection issues?)

• Contract issues (JOAs, leases, royalties?)

• Avoidance actions (preferences, fraudulent transfers)

• Post-confirmation (reorganized debtor or liquidation trust)

14

Overview of the Chapter 11 Process

• Chapter 11 case is commenced by the filing of a bankruptcy petition

-- voluntary petition

-- involuntary petition (becoming more and more common)

• Most debtors file Chapter 11 where they are domiciled (i.e., incorporated) or where their primary place of business is located.

• Generally, the debtor continues to operate its business in the ordinary course as the “debtor in possession.” The bankruptcy court can appoint a trustee to take over operations from the debtor if it finds sufficient cause.

• The mere filing of a bankruptcy petition affords the debtor the benefit and protection of the automatic stay.

• The filing of a case creates a “bankruptcy estate” comprised of all property and rights of the debtor.

15

Overview of the Chapter 11 Process (cont’d)

• “First-day” motions are motions typically filed with or shortly after the debtor’s petition in a Chapter 11 case.

-- Purpose is to ease the debtor’s transition into Chapter 11

• “First-day” motions vary from case to case but typically include:

-- Administrative motions (i.e., joint administration, notice procedures, etc.)

-- Operational motions (i.e., cash management, critical vendors, utilities, employee benefits and wages)

-- Substantive motions (i.e., cash collateral, DIP financing, contract/lease rejection)

* The relief sought in first-day motions can substantively affect a creditor’s rights, and such motions should be carefully reviewed.

16

DIP Loan Considerations

• New lender or existing lender?

• Did Debtor, FA, or IB shop the loan?

• Market rates / terms?

• Superpriority administrative claim?

• Junior lien?

• Priming lien?

• Roll-up?

• Chapter 5 causes of action?

17

Overview of the Chapter 11 Process (cont’d)

• The debtor files its statement of financial affairs and schedules of assets and liabilities (incl. top 20 list)

• Committee of Unsecured Creditors typically formed

• 341 Creditors meeting held

• Proof of claim deadline set

• Stabilization of business

-- 363 asset sales

-- leases / executory contracts

-- monthly operating reports

-- disclosure statement / plan negotiation

• Approval of Disclosure Statement & confirmation of Plan

-- chapter 11 plan of liquidation

-- chapter 11 plan of reorganization

• Post-Confirmation matters

-- preferences and fraudulent transfer claims?

18

Oilfield Service Company Bankruptcies

• Bankruptcy cases involving oilfield service companies are not much different than other Chapter 11 cases.

• For example, a Chapter 11 case would likely result in the appointment of an official committee (unsecured, equity or both) and negotiations with secured creditors.

• 363 assets sales are commonplace.

-- naked auction v. stalking horse

• Many successful cases have been prearranged deals either to sell or restructure.

19

E&P Company Bankruptcies

• Bankruptcy cases involving E&P companies are also generally run the same as any other Chapter 11 case EXCEPT E&P companies present several unique issues.

-- How are oil & gas leases characterized? Are they an interest in real property or simply an executory contract?

-- How are joint operating and farmout agreements characterized?

-- Do service providers have any specific protections?

-- Regulatory agencies?

Upstream Sale Issues

• 363 sale “free and clear”

-- JIBS?

-- M&M liens?

-- Consent rights / rights of first refusal?

-- Ongoing vendor obligations / production proceeds?

-- Environmental concerns?

-- Lessor notice issues?

21

Executory Contracts and Unexpired Leases

in Bankruptcy

• A debtor’s ability to assume or reject unexpired leases or contracts that are “executory” is one of the most important entitlements created by the Bankruptcy Code. 11 U.S.C. § 365.

• An executory contract is “[a] contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.”

22

Executory Contracts and Unexpired Leases

in Bankruptcy (cont’d)

• Rejection results in breach of the contract

-- rejection damages treated as a pre-petition unsecured claim (unless debtor has posted security).

-- rejection by lessee may result in the mineral interest reverting to the lessor.

• Assumption requires the debtor to cure all existing monetary defaults and provide adequate assurance of future performance.

-- if assumed, no preference liability.

-- if lease is considered a lease of real property under state law, then certain historical non-monetary defaults need not be cured. 11 U.S.C. 365(b)(1)(A).

• Except with respect to certain kinds of contracts such as nonresidential real property leases, the debtor has until plan confirmation to decide whether to assume / reject.

-- counter-party can seek to compel assumption / rejection sooner.

-- pending decision to assume or reject, debtor is generally obligated to keep current on obligations arising post-petition.

23

Oil & Gas Leases in Bankruptcy

• Texas, Oklahoma, New Mexico and others:

-- Oil and gas leases convey to the lessee an ownership interest in real property, therefore Section 365 is inapplicable.

• Louisiana:

-- Controversial and undecided.

• Kansas, Ohio:

-- Oil and gas leases convey contract rights only (Section 365 applies).

• OCS:

-- Undecided issue.

-- The U.S. has taken the position that an OCS lease is a true lease rather than an interest in real property.

24

JOAs in Bankruptcy

• Joint Operating Agreements are generally considered to be executory contracts (although they may include liens and covenants running with the land that are not executory).

• If a Joint Operating Agreement is rejected, then the debtor is a co-tenant with the other working interest holders.

• “Twilight Zone” before assumption or rejection:

-- terms of contract not enforceable against Debtor

-- but non-Debtor has to perform

-- See NLRB v. Bildisco & Bildisco, 465 U.S. 513, 532 (1984). But see Wilson v. TXO Prod. Corp. (In re Wilson), 69 B.R. 960, 963 (Bankr. N.D. Tex. 1987).

• Operators should make sure JOA’s are recorded.

25

Farmout Agreements in Bankruptcy

• A farmout agreement is an agreement to assign an interest in an oil and gas lease in exchange for the performance of drilling or testing operations on the land.

-- If unperformed, courts have found that the farmout agreement is executory.

-- Safe Harbor: Oil and gas interests assigned or earned and agreed to be assigned under a farmout agreement are not property of the farmor’s bankruptcy estate pursuant to Section 541(b)(4).

-- The safe harbor only protects the farmee under a farmout agreement, not the farmor.

26

M&M Liens

• Various states have enacted laws to protect the rights of service providers by granting them statutory mechanics & materialmen’s liens to secure payment for their services.

-- Tex. Prop. Code Ann. § 56.002 (“A mineral contractor or subcontractor has a lien to secure payment for labor or services related to the mineral activities.”).

-- La. Rev. Stat. § 9:4861, et seq. (referred to as the “Louisiana Oil Well Lien Act”).

* “[T]he purpose of the Oil Well Lien Act is to protect those . . . who contribute labor, services, and equipment to the drilling of wells from the default of those who engage them.” See Guichard Drilling Co. v. Alpine Energy Servs., 657 So. 2d 1307 (La. 1995).

• Lien priority vs. financial lenders?

-- any gaps in perfection?

-- file lien notices timely

27

Royalty Owner Liens

• Tex. Bus. & Comm. Code § 9.343 (UCC)

-- A security interest in favor of royalty owners to secure obligations of first purchaser.

-- Automatically perfected PMSI attaches to production and proceeds thereof owned by, received by, or due to first purchaser.

* Tri-Union Development case (SDTX 2000) – upheld liens

* In re Semcrude, L.P., 2015 W.L. 4594516 (D. Del. 2015) (automatic perfection may be subject to law of state of incorporation).

• Boomer Sooners?

-- Oil and Gas Owners Lien Act of 2010 – 52 Okla. Statutes § 549 et seq.

-- Automatic perfection without financing statement or documentation.

-- “Oil and gas lien . . . Takes priority over any other lien, whether arising by contract, law, equity or otherwise, or any security interest.”

-- Attaches to oil and gas and proceeds thereof.

-- Newly revised and untested statute – not UCC (so no choice of law).

28

Plugging and Abandonment Issues

• Texas:

-- Commencement of drilling operations triggers duty to P&A well. Must begin within one year from date drilling or operations cease.

• Offshore:

-- Federal law requires decommissioning when wells and facilities are “no longer useful for operations.” Wells must be P&A’d one year after lease termination (includes removal of all equipment and facilities).

-- Joint and several liability of lessees and owners of operating rights (whenever…) (i.e., predecessor liability continues).

• Bankruptcy:

-- Can debtor abandon?

* Sometimes – see In re ATP Oil & Gas Corp., 2013 WL 3157567 (Bankr. S.D. Tex. June 19, 2013).

-- Administrative claims?

* Sometimes – see In re American Coastal Energy, Inc., 399 B.R. 805 (Bankr. S.D. Tex. 2009).

29

Louis R. Strubeck

Norton Rose Fulbright US, LLP

louis.strubeck@nortonrosefulbright.com

William R. Greendyke

Norton Rose Fulbright US, LLP

william.greendyke@nortonrosefulbright.com

H. Joseph Acosta

FisherBroyles, LLP

joseph.acosta@fisherbroyles.com