Updates

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.

Last week, we discussed the complexities of metals exploration chapter 11 bankruptcy cases and addressed several of the notable issues that arise in those cases. The discussion of significant issues continues below.

As the global price of oil has continued to decrease, the oil and gas industry has experienced some significant collateral damage. In 2015, several big industry players, including Quicksilver Resources, American Eagle Energy, Sabine Oil & Gas, Hercules Offshore, Milagro and Saratoga Resources filed for Chapter 11 bankruptcy. Magnum Hunter Resources, Corp., one of Ohio’s long-time oil and gas players, just recently filed for bankruptcy in December of 2015.

Leslie Benedict: “Money isn’t everything, Jett”
Jett Rink: “Not when you’ve got it.”
Giant (1956)

The past several years have not been kind to commodities exploration companies.  The price of gold dropped to $1,051/oz. in November 2015, a level that had not been seen since 2009.  Although the price of gold rebounded somewhat in January and February 2016 to just over $1,200/oz., the price has steadily decreased after peaking at $1,921/oz. in August 2011.  The price of silver has also decreased dramatically, with its price off 60% from the 2011 highs.  Copper has not escaped this trend, and was recently selling for just over half of its 2011 price.

In 2015, the energy sector accounted for more than one-half of all public company bankruptcy filings, including eight of the 10 largest filings. Current oil prices and bond values indicate that 2016 will be another active year. As of late January 2016, crude oil prices hovered around $30 per barrel. These low prices are reflected in the bond market, where in December 2015, approximately $80 billion in non-defaulted oil and gas debt was trading below 50 cents on the dollar.

The Bankruptcy and Creditors' Rights Bulletin provides an analysis of legal issues, recent court decisions and significant changes in bankruptcy and creditors' rights law. This edition highlights two key bankruptcy topics that should be of interest to many business clients.

Striking Oil: Mineral Lien Laws that Provide Protection to Oil & Gas Creditors

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.

Since the third quarter of 2014, the appetite for lending to small and midsized exploration and production companies (E&P Companies) has decreased substantially for several reasons. The most significant reason is the drop in oil prices to the WTI Spot close at Cushing, Oklahoma in the $35 per barrel range at the end of 2015.