Secured Lending in the Oil & Gas Industry

Secured Lending in the Oil & Gas Industry

Documenting liens on collateral in secured energy transactions and recent lessons from distressed borrowers.

April 8, 2016

Overview I. Falling Oil Prices and Distress in Oil and Gas Sector

II. Oil and Gas Background

III. Comptroller’s Handbook: Oil and Gas Production Lending

IV. Secured Lending in the Oil & Gas Industry

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I. Falling Oil Prices and Distress in Oil and Gas Sector

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Falling Oil Prices and Distress in Oil and Gas Sector

OIL & GAS SNAPSHOT - FEBRUARY 2016 4

•In the last year, (through February 23) nearly $5 billion of energy institutional loans have defaulted. The latest was Paragon Offshore, with $641.9 million of institutional loan debt. •Leveraged loan issuance in the oil & gas sector is not surprisingly off to a slow start, with volume at $1.9 billion year to date. In the same period, there has been no high yield bond issuance in the oil & gas sector. •In full year 2015, leveraged loan issuance in the oil & gas space amounted to $49 billion compared to $25 billion in the high yield bond market. Volume in both markets represented a roughly 50% decline compared to a year earlier.

•In 2015, the vast majority of leveraged loan issuance in the oil & gas sector was pro rata debt. Institutional volume was down over 60% to $6.3 billion, compared to a drop of 47% in the pro rata market to $42.8 billion. •The oil and gas share of institutional loan outstandings is now roughly 3.4%. •Oil & gas loan bids have tumbled to the 54 area on a straight average basis. When weighted by loan size, the average bid is in the 52 area. Over 60% of oil & gas loans are now bid below 70, while only 7% are priced in the 95-plus area.

OIL &

GAS SN

APSHO

T

Source: Thomson Reuters LPC

Falling Oil Prices and Distress in Oil and Gas Sector

• Over 70% drop in oil prices in the last 18 months from highs of $112 in June 2014.

• In full year 2015, leveraged loan issuance in the oil & gas space amounted to $49 billion compared to $25 billion in the high yield bond market. Volume in both markets represented a roughly 50% decline compared to a year earlier.

• The oil and gas share of institutional loan outstandings is now roughly 3.4%.

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All U.S. LoansU.S. Oil & Gas LoansWTI Crude Oil (US$)

Source: Thomson Reuters LPC

Falling Oil Prices and Distress in Oil and Gas Sector Sh

are

of l

oans

Avg. bid (% of par)

6

DISTRIBUTION OF OIL & GAS INSTITUTIONAL TERM LOAN BIDS

OIL & G

AS SNAPSH

OT

OIL & GAS SNAPSHOT - FEBRUARY 2016

• Over 60% of oil & gas loans are now bid below 70, while only 7% are priced in the 95-plus area.

Falling Oil Prices and Distress in Oil and Gas Sector B

id (%

of p

ar)

Avg. BidMedian Bid

OIL & GAS SNAPSHOT - FEBRUARY 2016 7

OIL & GAS LOAN BIDS – BY SUBSECTOR

• Oil & gas loan bids vary widely by subsector. • Loan bids are lowest for issuers in the upstream subsector followed by the services subsector. • Loan prices are highest in the downstream sector.

OIL & G

AS SNAPSH

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Falling Oil Prices and Distress in Oil and Gas Sector BloombergBusiness reported on February 24, 2016 that:

• In less than a month, the U.S. oil bust could claim two of its biggest victims yet. Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy.

• If the two companies fail in March, it would be the biggest cluster of oil and gas defaults in a month since energy prices plunged in early 2015. . . .

• Others are probably coming. The number of U.S. companies that have the highest risk of defaulting on their debt is nearing a peak not seen since the height of the financial crisis, according to a report by Moody’s Investors Service earlier this month. The oil and gas sector took up the biggest share, accounting for 28 percent, or 74 borrowers.

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Source: BloombergBusiness

II. Oil and Gas Background

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Oil and Gas Background • Major segments of the Oil & Gas industry include exploration and production

(upstream); gathering, processing, storage and transportation of oil or natural gas (midstream); and refining, marketing, and distribution (downstream).

• Also associated with the upstream segment are oil field services companies.

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Source: Energy Education Team at the University of Calgary

Oil and Gas Background • Upstream

– Mineral rights owned by landowner; production companies enter into leases for minerals, which are typically severed from the surface estate, and sometimes limited to specific geographic formations or depths

– Value created prior to wellhead through exploration and production activities (assisted by service providers)

• Seismic testing to “see” formations and subsurface structure

• Exploratory well to determine types of hydrocarbons and chemical properties (i.e. contaminants, viscosity, etc., which influence marketability).


Oil and Gas Background • Upstream (cont.)

– Geological formations and types of reserves

• Most wells drill to thousands of feet of depth, passing through dozens of distinct geographical formations, of which only 2 or 3 may contain hydrocarbon reserves

• Upon “completion” of a well, the wellbore is perforated to allow selected hydrocarbons from formations to flow into wellbore. At this point, the hydrocarbons in that formation are proved and developed.

– Hydrocarbons produced are usually mix of oil, gas and other hydrocarbon products somewhere on the spectrum, usually along with water


Oil and Gas Background • Conventional and Unconventional

– Conventional wells are produced from porous formations with a single vertical well, being able to drain a large area due to porosity of the formation

– Unconventional formations are much less porous (e.g., shale) and thus horizontal drilling and fracturing the formation is necessary to release the hydrocarbons in the area around the wellbore

– Unconventional production has accounted for huge increase in production in North America.


Source: Government of British Columbia

Oil and Gas Background • Upstream (cont.)

– Once most conventional wells are completed, they can be left with little modification and follow a years-long decline curve

– Unconventional wells are more likely to have huge production for a few years and then have the decline curve fall off quite rapidly

Conventional Well Decline Curve


Source: Robelius, F., 2007. Giant Oil Fields - The Highway to Oil: Giant Oil Fields and their Importance for Future Oil Production, doctoral thesis from Uppsala University, p. 156

Oil and Gas Background • Midstream

– The term “midstream” applies to a variety of services and operations occurring after wellhead, generally fee-based

– Gathering

• A third party (occasionally an affiliate of the upstream producer or operator) will enter into Gas Gathering Agreements with producer for specified areas.

• For any wells drilled in the specified area, the gatherer agrees to build a pipeline to the wellhead (each, a “receipt point”), connect that pipeline to the backbone of the gathering network, and delivery the hydrocarbons to certain pre-agreed “delivery points”, where the hydrocarbons can be sold to a market.

• The gatherer commits to deliver a certain amount of hydrocarbons per month. Typically the producer cannot use another company as gatherer in the specified area.

• The gatherer agrees to deliver the hydrocarbons up to a total amount in exchange for a fee per unit (e.g., MMCF or barrel). If the producer would like the gatherer to deliver a higher amount, the gatherer may agree to take such a request, but the fee is higher than the “committed” amounts.


Oil and Gas Background • Midstream (cont.)

– Processing

• When hydrocarbons are produced, if there are contaminants in excess of industry-agreed standards, the hydrocarbons cannot be sold to the market without separation and purification

• The processor agrees to purify the hydrocarbons in exchange for a fee per unit (e.g., MMCF or barrel), and frequently can keep the by-products (such as NGLs).

– Storage

• Due to seasonal fluctuation in price of gas, some companies store large quantities in the summer months.

– Midstream agreements in a bankruptcy proceeding: With the threat of upstream bankruptcies, both producers and midstream players need to carefully review their midstream arrangements as to their enforceability in bankruptcy. These are complex issues involving dedication, priority, jurisdiction, adequacy of description and other issues.


Oil and Gas Background


Recent cases are examining issues as to the survival of midstream agreements in bankruptcy.

Bankruptcy process as to rejection under

§365(a)

Pipeline transportation agreements with no

dedication of acreage

Gathering and processing agreement

where there is dedicated acreage: do the dedications create

“covenants running with the land”?

https://thenounproject.com/term/pipeline/53646

https://thenounproject.com/term/link/22564

In re Sabine Oil & Gas Corp., Case No. 15-11835 (Bankr. S.D.N.Y) • Sabine’s §365(a) Motion: Sabine filed a motion (the “Rejection Motion”) in its bankruptcy

proceeding seeking approval to reject, pursuant to Section 365, certain prepetition (i) gas and condensate gathering agreements with Nordheim Eagle Ford Gathering, LLC (“Nordheim”), and (ii) production gathering and handling agreements with HPIP Gonzales Holdings, LLC (“HPIP”). The Nordheim and HPIP agreements included “dedications” providing that Nordheim and HPIP had the exclusive right to, among other things, gather product from Sabine’s oil and gas properties in specific identified areas in Texas. – Nordheim and HPIP Objections: Nordheim and HPIP each objected to the Rejection Motion on the

basis that the dedications gave rise to real property covenants that run with the land. They argued that although the agreements may technically be rejected pursuant to Section 365, the covenants would continue to encumber the land and thus rejection would not benefit Sabine’s estate.

– Sabine’s Reply: Sabine argued that under Texas law, the Nordheim and HPIP agreements did not establish covenants running with the land because there was no privity of estate between Sabine and either Nordheim or HPIP. Sabine urged that to demonstrate privity of estate under Texas law, one party must convey an interest in property to which a covenant attaches. A valid conveyance requires both (1) clear language evidencing an actual grant of such interest, and (2) the intent of the grantor to convey an interest in property.

– Granting Language: Sabine argued that the dedications in the Nordheim and HPIP agreements were not sufficient to grant interests in real property because they did not include the words “grant,” “sale,” or “assignment” of any “interest in” property.


In re Sabine Oil & Gas Corp., (Cont’d) – Other Gathering Agreements with Proper Language Not Rejected: At a hearing in the bankruptcy

proceeding, Sabine’s counsel noted that Sabine has not yet attempted to reject gathering agreements with other parties that contain “stronger” granting language.

• Hearing on the §365(a) Motion: At the hearing on the Rejection Motion, the judge stated she is “inclin[ed] toward a ruling that [the dedications are] not covenants running with the land,” noting: (i) the dedication language in the agreements was “not a conveyance”; (ii) in Energytec, the fee under the relevant agreements burdened the land because if it was not paid it would have resulted in a loss of ownership and use of the pipeline through foreclosure, which was not applicable here; and (iii) the Nordheim and HPIP agreements related to “oil, gas and water produced by Sabine. Those are . . . personal property items . . . not real property.”

• Note: Regardless of the outcome of the Sabine case, gathering agreements should include proper granting language, the owner of the burdened property should be a party to any such agreement, and such agreements should convey recognized property interests to the extent possible. Midstream service providers will also seek forms of security to mitigate the risks of contract rejection.


III. Comptroller’s Handbook: Oil and Gas Production Lending


Comptroller’s Handbook: Oil & Gas Production Lending

• Both lenders and borrowers in an oil and gas financing are well served if they understand the basic parameters established by the OCC for underwriting and collateral valuation, loan documentation, perfection and recording of security interests in real and personal property, lender due diligence and monitoring.

• These parameters provide guidelines for the transaction in key respects and influence the lender/borrower relationship over the life of the loan.

• Should the deal get into trouble, the way the OCC examiners decide to evaluate the loan will play a major role in how free or how tied the bank’s hands are in extending additional credit, putting a workout in place or accelerating the loan.

• While the OCC booklet is written for lenders, astute borrowers and their counsel will be well-served knowing the lending parameters established in the booklet. In the case of difficult times such as those we are currently experiencing, an understanding of these guidelines will be very helpful.

See Barkley Clark, et al., CLARK’S OIL AND GAS FINANCING UNDER THE UCC § 1.07 (LexisNexis A.S. Pratt). SIDLEY AUSTIN LLP 21

http://www.occ.gov/publications/

Comptroller’s Handbook: Oil & Gas Production Lending • Reserves are unique assets, classified based on likelihood of recovery

• The following chart shows the relationship among different types of reserves:

See Office of the Comptroller of the Currency Manual, OIL AND GAS PRODUCTION LENDING 4 (April 2014). SIDLEY AUSTIN LLP 22

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Comptroller’s Handbook: Oil & Gas Production Lending • Proved reserves of crude oil and natural gas are estimated quantities that

geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs using existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made). – The O&G industry standard for the probability that Proved reserves will be technically

and economically productive is 90 percent.

– Reservoirs are considered proved if economic productive capacity is supported by either actual production or a conclusive formation test.

• Proved reserves can be categorized as developed or undeveloped.

• Developed O&G reserves are reserves that can be expected to be recovered through existing wells and operating methods.

• Proved developed reserves subcategorized as producing (PDP) are expected to be recovered from completion intervals that are open and producing at the time of the estimate. Cash flow generated from the sale of oil or natural gas in the future is the basic premise of reserve-based lending. For this reason, prudence mandates that loan underwriting be predicated primarily on PDP reserves.

• OCC Manual 5


Comptroller’s Handbook: Oil & Gas Production Lending • Proved undeveloped (PUD) O&G reserves are expected to be recovered from

new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

• Unproved reserve estimates of crude oil, natural gas, and natural gas liquids are also based on geological and engineering data but do not indicate the high degree of certainty associated with proved reserves.

• Probable O&G reserves are supported by favorable engineering but are subject to some risk that prevents classification as proved. The O&G industry standard for the probability that reserves will technically and economically produce is 50 percent.

• Possible reserves are speculative O&G properties where there is a high risk of unsuccessful drilling. The O&G industry standard for the probability that reserves will technically and economically produce is 10 percent.

OCC Manual 5-6


Comptroller’s Handbook: Oil & Gas Production Lending • Establishing the borrowing base:

• The borrowing base for O&G loans is the estimated value of O&G that can be produced from the mineral rights. It is determined by analyzing prior production reports and independent engineering valuations.

• Typically, a borrower can draw against the credit as many times and as often as needed up to the lesser of the available borrowing base or the note amount.

• Ideally, the borrowing base will be based primarily on PDP properties. These properties should be producing satisfactorily for a period—typically six months or more—that is sufficient to generate reliable production results (run data).

• The proceeds of this production should be sufficient to amortize the debt over a reasonable amount of time (three to seven years) with some portion of reserves remaining.

• When banks advance on PDNP or PUD reserves, it is particularly important to fully support the risk factors used to determine the discount rate. Banks should not advance on unproved reserves.

OCC Manual 17-18


IV. Secured Lending in the Oil & Gas Industry



• Oil & Gas development and production is very capital intensive

• “According to some estimates, the development of assets in shale basins in the United States alone will require more than $5.1 trillion of additional capital by 2035.”

• Traditionally, significant amounts of such capital is raised through leveraged loans secured by oil & gas reserves or by midstream assets (gathering, processing, transmission and storage infrastructure)

• The balance of our presentation will discuss structuring and documenting secured loans to oil and gas companies. Most of our focus will be on upstream facilities with some discussion of midstream

See Douglas E. McWilliams, “Raising Capital for the Oil & Gas Industry,” 59 Rocky Mt. Min. L. Inst. § 12.01 (2013)


Secured Lending in the Oil & Gas Industry • Upstream Lending

– Reserve-based revolving loan

– PDP and PDNP reserves given credit but at different percentages of values; occasionally PUDs given some partial credit

– The valuation of the production (over time) is contingent on what it can be sold for in the future.

• Banks use futures markets and internal analysis to create a “price deck” of predicted prices for years into the future.

• Other lenders require (and all lenders allow) hedges or collars to fix a known price.

• Based on predicted production based on the decline curve, multiplied by the applicable price and discounted to present value, the lender creates a borrowing base.


Secured Lending in the Oil & Gas Industry • Upstream Lending (cont.)

– In a down market, hedges become very important

• Many borrowers hedge a portion of their production for at least a year, thus delaying the effects of a drop in the price of oil and gas

• Hedges valued at mark-to-market (i.e. difference between strike price and market price for commodity)

• Hedges themselves may be more valuable than the produced hydrocarbons

– Borrowers economically encouraged to hedge with an affiliate of a lender, as such hedges share in collateral and thus can be purchased at lower cost.


Secured Lending in the Oil & Gas Industry • Upstream Lending (cont.)

– Because the borrowing base is typically entirely derived from the value of the oil and gas reserves, diligence and liens are focused almost exclusively on real property assets

– Mineral leases can be mortgaged and are treated as real property interests

– Title diligence to ensure that mineral leases are actually with the legal owner of the mineral interests

• No title insurance policy, but title diligence required

• Ongoing requirement to ensure an agreed percentage of title coverage on a rolling basis


Secured Lending in the Oil & Gas Industry • Title Diligence

– High level of complexity in due diligence as a result of various recorded and contractual burdens and contingent obligations for oil and gas assets that have been in production

– Frequently, there are many royalties and severed interests that a borrower must deduct from represented percentage ownership of mineral rights

– Title opinion created by specialist lawyers and land professionals

– Lender’s counsel must be able to provide an accurate evaluation of risks contained in title opinion and evaluate consequence to collateral



Title Evidence Percentage of the total value of the proved properties

Economic One Liner High-grade properties based on value and common title; the “80/20” rule

Data Room Borrower provides title to properties

Due Diligence Land and legal review

Public Records Search No divestitures and free of liens

Exhibit A List of all leases and wells

Closing Execute Mortgage

Recording Post-Closing Conditions

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Title Diligence


Title Due Diligence

Contracts (Farmouts, JOAs,

etc)

$$/Pay Status

Revenue Statements/

Division Orders

Assignments

Title Opinions Plats

WI & NRI

Leases



The purpose of a title opinion is to set forth record title on the lands and minerals in question − The title opinion gives the status of title to lands (surface, minerals, and royalties, etc.), giving the current

ownership subject to the defects discussed therein and sets forth curative measures that should be taken to ensure that title does not fail.

− Title Opinions are used to verify that leases have been obtained from the correct individuals and to ensure that the appropriate individuals are paid.

Title Defects − Commonly, curing title defect requirements involves obtaining various documents, including affidavits, ratifications,

amendments, correction deeds, assignments, and probate proceedings, filing same of record in the county where the land is located, and providing a copy for the attorney to review and determine the impact on title.

− It is the job of the company, in-house, to determine the level of business risk involved in going forward without curing same.

− This will depend, of course, upon how aggressive the company wants to be, the price of oil and/or gas, the availability of rigs, etc.



• Article 9 makes is clear that “minerals before extraction” are not goods in UCC-102(a)(44). That provision, together with UCC-109(d)(11) lead to the conclusion that Article 9 is not applicable until the hydrocarbons are severed.

• Reserve-based loans are typically secured by real estate mortgages on the oil and gas in the ground and Article 9 security interests in the as-extracted hydrocarbons, in associated contract rights, in the receivables generated from sale of the oil and gas at the wellhead, and in fixtures and equipment used at the site.

• The oil and gas mortgage creates a real estate lien and intersects with Article 9, insofar as it seeks to pursue the minerals and their proceeds upon extraction, when they become personal property. With respect to the oil and gas reserves in the ground, Article 9 has no application.


Intersection of Real Estate Mortgage Law and the UCC

Secured Lending in the Oil & Gas Industry • Given the dual real vs. personal property nature of oil and gas collateral,

practitioners often include provisions in a mortgage or deed of trust that in addition to creating a mortgage lien are sufficient to (1) create a security agreement and (2) identify a variety of collateral for the purposes of an Article 9 financing statement. Indeed, in the case of as-extracted collateral and fixtures, UCC 9-502 sets forth a series of requirements that must be followed if the real property mortgage is to double as a financing statement, since both the mortgage and financing statement for these types of collateral are filed in the same location—typically the county recorder or register of deeds. To perfect security interests in other types of collateral, an appropriately worded mortgage is simply appended to a standard UCC-1 and filed with the appropriate office for the type of collateral covered—usually the secretary of state where the debtor is located.

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See Barkley Clark, et al., CLARK’S OIL AND GAS FINANCING UNDER THE UCC § 1.01 (LexisNexis A.S. Pratt).

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• Article 9 creates a category of collateral called “as-extracted collateral.” That term is defined in UCC § 9-102(a)(6) as oil, gas, or other minerals subject to a security interest that: (1) is created by a debtor having an interest in the minerals before extraction and (2) attaches to the minerals as extracted. It also includes “accounts arising out of the sale at the wellhead or minehead of oil, gas, or other minerals in which the debtor had an interest before extraction.” Official Comment 4c to UCC § 9-102 explains that unextracted oil and gas are treated as real property, to which Article 9 does not apply. Upon extraction, the oil and gas become personal property (goods), eligible to be covered as collateral under the rules of Article 9. Conversely, the UCC definition of “goods” expressly excludes oil and gas before extraction. UCC § 9-102(a)(44).

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See Barkley Clark, et al., CLARK’S OIL AND GAS FINANCING UNDER THE UCC § 1.01 (LexisNexis A.S. Pratt).

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UCC Issues: As-Extracted Collateral

Secured Lending in the Oil & Gas Industry • Comment 4 to UCC § 9-102 also includes three examples that help explain what

as-extracted collateral is and how it differs from other oil and gas collateral: – Example 5: Debtor owns an interest in oil that is to be extracted. To secure Debtor’s

obligations to Lender, Debtor enters into an authenticated agreement granting Lender an interest in the oil. Although Lender may acquire an interest in the oil under real-property law, Lender does not acquire a security interest under this Article until the oil becomes personal property, i.e., until it is extracted and becomes “goods” to which this Article applies. Because Debtor had an interest in the oil before extraction and Lender’s security interest attached to the oil as extracted, the oil is “as-extracted collateral.”

– Example 6: Debtor owns an interest in oil that is to be extracted and contracts to sell the oil to Buyer at the wellhead. In an authenticated agreement, Debtor agrees to sell to Lender the right to payment from Buyer. This right to payment is an account that constitutes “as- extracted collateral.” If Lender then resells the account to Financer, Financer acquires a security interest. However, inasmuch as the debtor-seller in that transaction, Lender, had no interest in the oil before extraction, Financer’s collateral (the account it owns) is not “as- extracted collateral.”

– Example 7: Under the facts of Example 6, before extraction, Buyer grants a security interest in the oil to Bank. Although Bank’s security interest attaches when the oil is extracted, Bank’s security interest is not in “as-extracted collateral,” inasmuch, as its debtor, Buyer, did not have an interest in the oil before extraction.


Secured Lending in the Oil & Gas Industry • As-Extracted Collateral (cont.)

– UCC § 9-301(4) provides the local law of the jurisdiction in which the wellhead is located governs perfection, the effect of perfection, and priority of a security interest in as-extracted collateral.

– UCC § 9-501, a financing statement covering as-extracted oil and gas is to be filed in the same local office where a mortgage on the unextracted oil and gas would be recorded. This will be a county office, not the secretary of state. Most deeds of trust or mortgages can act as a financing statement, but check local law of state. Where this is not allowed, a UCC-1 with an entire mortgage (with exhibits) is filed in the real property records as well.



• In most jurisdictions, O&G producers and royalty owners are unsecured creditors in the bankruptcy of a first purchaser of production and as such generally fair poorly.

• As a result, the producers and royalty owners have sought passage of the Oil and Gas Lien Act or non-uniform changes to the UCC and have had success in at least six states that have enacted such statutes.

• Texas UCC 9-343 provides a security interest in favor of interest owners, as secured parties, to secure the obligations of the first purchaser of oil and gas production, as debtor, to pay the purchase price

– Perfected automatically without filing of a financing statement

– The security interest exists in oil and gas production and identifiable proceeds thereof


First Purchaser Security Interests


• Fixtures means goods that have become so related to particular real property that an interest in them arises under real property law. See UCC 9-102

• In a midstream pipeline loan, most pipes would be fixtures.

• Perfection follows real property regime except in the case of Transmitting Utilities discussed below.

• Filing required in each county where fixtures are located, although a deed of trust may be effective to act as a fixture filing (depending on applicable state law).

• In the case of an interstate pipeline stretching hundreds of miles over multiple states, filing in each county is very time consuming and expensive and may not be practical.


UCC Issues: Fixtures

Secured Lending in the Oil & Gas Industry • In order to relieve administrative burden of county by county fixture filings for

transmitting utilities, the UCC allows for perfection by filing a transmitting utility financing statement in a single designated office (usually SOS) in each state the transmitting utility has fixtures. UCC 9-301(3)(a); UCC 9-501(b)

– Transmitting Utility is defined in UCC 9-102(a)(81) as follows:

• "Transmitting utility" means a person primarily engaged in the business of: (A) operating a railroad, subway, street railway, or trolley bus; (B) transmitting communications electrically, electromagnetically, or by light; (C) transmitting goods by pipeline or sewer; or (D) transmitting or producing and transmitting electricity, steam, gas, or water.

– There is scant case law addressing perfection against fixtures by the central filing of a Transmitting Utility financing statement, so counsel is sometimes hesitant to rely on this method of perfection in cases that are not clearly encompassed by the definition.

– Transmitting utility filing is on UCC form financing statement (with the box checked next to the statement that “A Debtor is a Transmitting Utility”), but there is no requirement to file a continuation statement every 5 years. UCC 9-515(f)



• Due to its liquid or gaseous nature and the need to move oil and gas from the point of production to storage facilities or refineries prior to consumption, commingling frequently occurs. Upon commingling, the identity of each party’s collateral is lost—since, for example, each molecule of methane is indistinguishable from every other—and a creditor’s security interest attaches to the commingled product or mass. A perfected security interest in oil or gas prior to commingling continues to be perfected as to the commingled product or mass. Such a perfected security interest has priority over a security interest that was unperfected at the time of commingling. A formula determines the priority of competing security interests that were perfected at the time of commingling: each secured party is allocated the proportion of the product or mass that the value of that secured party’s collateral bore to the sum of the values of all parties’ collateral at the time of the commingling.

Barkley Clark, et al., CLARK’S OIL AND GAS FINANCING UNDER THE UCC PP. 18-19 (LexisNexis A.S. Pratt). SIDLEY AUSTIN LLP 43

Commingled Oil and Gas


• Had the producers in the SemCrude litigation survived summary judgment, a huge battle relating to tracing commingled oil and gas product loomed. If the producers could have asserted liens on oil bought by a downstream purchaser, they—and their experts—faced the daunting task of demonstrating that a given downstream purchaser held some of the producer’s commingled product. SemCrude mostly used pipelines to ship the crude oil to its storage tanks in Cushing Oklahoma, where most of the crude oil was blended to account for the different qualities of oil from different locations. Because SemCrude purchased oil from over 100 producers and sold to over 15 purchasers, it would be very difficult for any producer to say with any certainty that its crude oil wound up in the hands of a given downstream purchaser.

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Commingled Oil and Gas, cont.

Barkley Clark, et al., CLARK’S OIL AND GAS FINANCING UNDER THE UCC P. 19 (LexisNexis A.S. Pratt). SIDLEY AUSTIN LLP

Sidley Biographies


KEN ANDERSON is a partner in Sidley’s Houston office. He primarily represents the arranger/administrative agent and borrowers in syndicated financings. His national syndicated bank financing practice includes experience in a broad spectrum of syndicated lending transactions, including energy financings, master limited partnership (MLP) financings, merger and acquisition financings, structured financings, project financings, multi-currency financings and highly leveraged transactions.

Ken has been recognized every year since 2005 by Chambers USA: America’s Leading Lawyers for Business in the area of Banking and Finance Law. He was also recognized in the 2005–2016 editions of The Best Lawyers in America.

.

Kenneth M. Anderson Partner Houston +1 713 495 4503 +1 713 495 7799 FAX [email protected]

Daniel F. Allison Associate Houston +1 713 495 4612 +1 713 495 7799 FAX [email protected]

DANIEL ALLISON is an associate in Sidley’s Houston office. His practice focuses commercial lending and other complex commercial finance and energy transactions. Daniel focuses on lending in the the energy industry with matters involving exploration and production companies, pipeline and storage companies, oilfield services companies and renewable energy projects.

A sampling of recent representations include:

• Represented administrative agent in $700 million syndicated secured revolving and term loan to a pipeline MLP company group.

• Represented the borrower company group, a private midstream pipeline company, in a $900 million syndicated secured revolving and term loan.

• Represented hedge fund sponsor in the financing to fund a portion of the acquisition of a $75 million consumer goods company.

• Represented administrative agent in $100 million syndicated secured revolving and term reserve-based loan to a private oil and gas production company.

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Secured Lending in the Oil & Gas Industry

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