Bankruptcy In The Energy Industry

April 28, 2016

Steven W. Soulé

Hall Estill

320 South Boston, Suite 200

Tulsa, OK 74103

Telephone: (918) 594-0466

Facsimile: (918) 594-0505

ssoule@hallestill.com

BANKRUPTCY OVERVIEW

– Federal Bankruptcy Law – It is the same across the United

States.

- Some issues may be state law specific (especially for royalty

owners).

– What is the difference between a Chapter 11 and a Chapter

7 bankruptcy case?

– What is the difference between an involuntary and a

voluntary bankruptcy?

STEPS TO TAKE WHEN A

BANKRUPTCY CASE IS FILED

– Obtain Information about the Case – Do I need to hire counsel?

– Assess early motions filed by the debtor in the case (i.e., motions to pay royalty owners, etc.).

- Many energy cases have early filings that protect royalty owners.

– Do I need to attend the Meeting of Creditors?

– Be Aware of the Proof of Claim Bar Date and assess whether you need to file a claim.

– Monitor the plan process and proposed distribution timeline.

- Pay attention to the treatment of royalty owners and the way the case is proceeding (liquidation v. reorganization).

BANKRUPTCY RIGHTS OF ROYALTY OWNERS

- Owners of royalty interests are creditors in

bankruptcy cases.

- Need to protect your rights in bankruptcy cases.

- Make note of the claim bar date if owed money.

- You may want to seek legal advice to make sure you

are being properly treated in the case.

- Companies will generally not be able to reject oil

and gas leases covering Oklahoma properties.

RECENT DEVELOPMENTS IN ENERGY

BANKRUPTCY CASES

- Natural gas is at a 17 year low as of March 2016.

- Oil price has gone down substantially but now at a high since November, 2015.

- Over 50 energy related bankruptcy cases filed in last two years.

- 20 plus E&P companies have filed bankruptcy in 2016. You can expect many more.

- Many of the energy related cases in the last two years have ended in a sale or liquidation.

- Most cases are filed in Delaware and Texas. Two in Oklahoma this year.

- Many producers seek immediate court authority to pay royalty claims to avoid lease termination.

- There is a safe harbor in the bankruptcy code for overriding royalty interests (541(b)(4)(B).

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THE SAMSON RESOURCES CASE

- Samson is one of the five largest energy bankruptcy cases of all time.

- The bankruptcy court in the Samson case entered an order which authorized the

debtor to pay pre- and post-bankruptcy mineral payments (including those for

overriding royalty interests, non-participating royalty interests, net profits interests,

production payments and unleased mineral interests) and working interest

disbursements in the ordinary course of business.

- This is very common in energy bankruptcy cases today.

- There are generally websites set up in every large energy bankruptcy case that have

great information for you to review.

- The order referenced above should have resulted in mineral payments being paid in

the ordinary course of business in the Samson case. This type of procedure is now

approved routinely in most energy bankruptcy cases. Bankruptcy courts generally

agree that funds held by an E&P debtor that are subject to a landowner’s royalty

interest are not property of the bankruptcy estate.

OIL AND GAS LEASES IN BANKRUPTCY

The issue of whether an oil and gas lease is an unexpired lease subject to

rejection in the bankruptcy court is a complicated legal question and not easily

answered. It depends in large part on state law.

Many states consider oil and gas leases to be interests in real estate and thus

not subject to rejection in bankruptcy court (Texas, Montana, North Dakota,

Wyoming and Oklahoma).

Other states consider oil and gas leases to be interests in personal property

and thus subject to rejection in a bankruptcy case (Michigan, Ohio, Kansas

and Wisconsin).

OIL AND GAS OWNERS’ LIEN ACT OF 2010

This was a response to the SemGroup bankruptcy case. The Oil and Gas Owners’ Lien Act of 2010 is

something that you should be aware of [Okla. Stat. tit. 52, Section 549.1-549.12]. See Fred. H. Miller & Alvin

C. Harrell, Aftermath of the SemGroup Case: Oklahoma Enacts the Oil and Gas Owners’ Lien Act of 2010, 81 OKLA.

BAR. J. 2818, 2819 (2010).

This new act “explicitly and unbendingly grants superior priority to Oklahoma interest owners above all other

lien holders and U.C.C. Article 9 secured creditors.” Gaskins v. Texon, LP, 321 P.3d 985, 990 (Okla. Civ. App.

2013; see also OKLA. STAT. ANN. tit. 52, § 549.7 cmt. 1 (West 2011) (stating that the Lien Act of 2010 “creates

an automatic super-priority” over other liens and security interests); Sahar Jooshani, There’s a New Act in Town:

How the Oklahoma Oil and Gas Owners’ Lien Act of 2010 Strengthens the Position of Oklahoma Interest Owners, 63 OKLA.

L. REV. 133, 141 (2012) (stating that the Lien Act of 2010 “gave Oklahoma oil and gas interest owners superior

priority over other Oklahoma lien holders and U.C.C. Article 9 secured creditors”); Alvin C. Harrell et al.,

Emerging Commercial Law and UCC Issues for the Next Farm and Business Credit Crisis, 17 DRAKE J. AGRIC. L. 89,

100 (2012) (describing the Lien Act of 2010 as creating liens with “automatic super-priority” over other liens

and security interests); Miller & Harrell, supra, at 2820 (describing the Lien Act of 2010 as creating liens with

“automatic super-priority” over other liens and security interests).

OIL AND GAS OWNERS’ LIEN ACT

- Oklahoma (and Texas) royalty owners have statutory lien rights.

- In Oklahoma, the lien is automatically perfected.

- The lien applies to oil and gas proceeds.

- The Act makes Oklahoma law the applicable law.

- An interest owner’s lien extends to oil and gas production and proceeds sold to and held by the first purchaser.

- The intent of the Act if for an Oklahoma interest owner to have a statutory lien with a senior priority in the proceeds of oil and gas.

- A first purchaser is required to pay, in full, the purchase price of oil or gas to the Oklahoma interest owner.