Part 5: Bankruptcy Issues for Secured Creditors

In the final installment of this series on the oil & gas industry, Orrick Restructuring Chair Ron D’Aversa and Restructuring Partner Doug Mintz survey the bankruptcy landscape for the oil & gas industry in the current low-price climate, outlining strategic reasons for bankruptcies, how unencumbered assets make for an atypical bankruptcy case, and how valuation and new borrower options could ultimately lead to adversarial cases.

Precipitous commodity price declines that began in mid-2014 continued to disrupt the oil and gas industry in 2015, outlasting the expectations of many analysts. By the end of 2015, prices for both Brent and WTI crude were fluctuating in the mid to upper $30s per barrel, down from highs of over $100 a barrel in mid-2014.

2015 was a rough year for the oil and gas industry.  The primary source of the trouble was (and continues to be) the dramatic fall in crude oil prices. In 2014, the price of U.S. crude oil averaged approximately $91 per barrel.  In 2015, the price dropped to an average of approximately $49 per barrel.  As of this writing, the price was approximately $36 per barrel.

Oil and gas price volatility is as much a part of the energy business as drill bits. Few predicted that the current down-cycle would be as long or as deep as it is proving to be. While global events could turn and prices improve, lower prices seem to be a reality for now. Lower prices impact the finances of everyone in the energy industry. Insolvencies, business failures, and bankruptcies are inevitable in this environment; and when they occur, they affect everyone, at all levels and in all aspects of the industry.

On New Year's Eve 2015, Swift Energy Company and 8 affiliates filed a voluntary petition commencing a prepackaged chapter 11 case in the United States Bankruptcy Court for the District of Delaware.  The case is docketed as case no. 15-12670, and has been assigned to The Honorable Mary F. Walrath.  The petition lists assets of $1.024 billion and liabilities of $1.349 billion.

More than three dozen US energy industry companies (E&Ps) filed for chapter 11 this year, with three more – New Gulf Resources LLC, Magnum Hunter Resources Corp., and Cubic Energy Inc. – filing just this third week of December. According to BloombergBriefs.com, even before these most recent filings. energy sector filings accounted for 26% of all chapter 11 filings in 2015, which is the largest share of filings for any sector. Just when the industry thought oil prices could not go any lower, they have.

Bankruptcy often has a significant impact on the way a business operates. This makes sense, given that businesses going through the bankruptcy process have to figure out a way to make themselves viable after the process is complete. Oftentimes, part of what has to happen for a business to remain viable going forward after a bankruptcy is to sell off assets and portions of the business.

A district court judge in the Middle District of Pennsylvania recently vacated a bankruptcy court’s decision allowing rejection of an oil and gas lease under section 365 of the Bankruptcy Code.  The District Court held that a debtor’s oil and gas lease was a conveyance of an interest in real property and not an executory contract or unexpired lease that could be rejected in bankruptcy under Section 365 of the Bankruptcy Code.

Although almost eight years have lapsed since the chapter 11 cases of Tulsa, Oklahoma-based SemCrude L.P.

The recent TMA Global Annual Conference in Scottsdale Arizona gave us a great opportunity to meet with friends and colleagues old and new and swap intel and war stories!    The buzz at the conference was around the oil and gas sector.   Drilling down: Turmoil in Oil and Gas was the panel moderated by our very own Michael Cuda.   It created immediate and ongoing comment, not just at the conference but also in the wider media.  See web link from