Introduction
Nearly every day a different E&P company makes an announcement that indicates the company is facing financial distress, insolvency or bankruptcy. Many of these companies are Operators under Joint Operating Agreements and with each announcement there are likely Non-Operators concerned about the impact these events will have on their non-operated working interests. Non-Operators should understand their JOA rights and options when their Operator becomes distressed.
A March 8 2016 decision of the influential Bankruptcy Court for the Southern District of New York has attracted attention from – and caused concern for – owners of pipelines and other midstream assets, as well as lenders to midstream and upstream lenders across the United States.
On remand by the First Circuit Court of Appeals, the Federal District Court of Massachusetts found Sun Capital Partners III, LP (“Sun Fund III”) and Sun Capital Partners IV, LP (“Sun Fund IV, and together with Sun Fund III, the “Sun Funds”) liable for the withdrawal liability of Scott Brass, Inc.
This alert describes certain information regarding the recently filed bankruptcy case of Emerald Oil, Inc. and is an example of current developments in the energy industry.
Emerald Oil, Inc. and its subsidiaries (collectively referred to as the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on March 22, 2016 in the District of Delaware, pursuant to which the Debtors plan to sell substantially all of their assets (the “Assets”) in a possible auction in July 2016.
With the steep collapse of oil and gas prices in the last eighteen months, dozens of exploration and production companies have declared bankruptcy and many more companies are expected to file for bankruptcy protection unless prices rebound dramatically. As the prospect of further bankruptcies looms, it is important for parties to understand how to adequately protect their security interests and the nature of competing liens that could prevent them from fully realizing on the value of the collateral securing their counterparty’s obligations.
Securities Alert February 1, 2016 E&P Restructurings: Focus on Uptiering Transactions By: Jennifer Wisinski, Paul Amiel, Bill Nelson and Kristina Trauger Times are tough, very tough, for many mid-cap and small-cap exploration and production (“E&P”) companies. Crude oil prices have fallen from more than $100/barrel in July 2014 to a twelve-year low of less than $30/barrel in January 2016. Natural gas prices are at a three-year low. The growing consensus is that depressed prices will experience a slow recovery that may continue into the 2020s.
Sophisticated real estate lenders spend significant amounts of time and energy attempting to insulate themselves from potential bankruptcy filings by their borrowers. A primary reason, which many an experienced real estate lender has found out the hard way, is the risk that a debtor in bankruptcy may “cram down” a plan of reorganization over its lender’s objection. Under a typical cramdown plan, a debtor may stretch out payments to its secured creditor for several years and attempt to replace its negotiated interest rate with a new, below- market rate of interest.
Most due diligence processes in a business acquisition context require a review of material contracts and, in particular, a review of any restrictions on assignment of those contracts.
When a business enters into a long term commercial contract with a customer, the identity of that particular counterparty may influence the terms of the contract. A party deemed more favourable may obtain a better price or better terms. Unless restricted by enforceable anti-assignment provisions, these favourable contracts can be very valuable in a traditional M&A context.
Of general interest is the appeal in the case of Horton v Henry, on which we reported in our January 2015 update. In Horton, the High Court declined to follow a previous ruling, and decided that a bankrupt could not be compelled to access his pension savings to pay off creditors.