Section 363 Sales in Oil & Gas Bankruptcies: Purchasing ...media.straffordpub.com/products/section-363-sales-in-oil-and-gas... · 04/10/2016 · Select Oil and Gas Bankruptcy Filings

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Presenting a live 90-minute webinar with interactive Q&A

Section 363 Sales in Oil & Gas Bankruptcies:

Purchasing Oil & Gas Assets Navigating Procedures for Bankruptcy Acquisitions, Weighing Considerations

Unique to Oil and Gas Assets, Mitigating Risks

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, OCTOBER 4, 2016

John M. Grand, Partner, Vinson & Elkins, Dallas

Mark Brannum, Vice President, General Counsel and Secretary, Jonah Energy, Denver

William L. Wallander, Partner, Vinson & Elkins, Dallas

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SECTION 363/PLAN SALES IN OIL & GAS BANKRUPTCIES:

PURCHASING OIL & GAS ASSETS

OCTOBER 2016

www.velaw.com

Confidential and Proprietary ©2016 Vinson & Elkins LLP www.velaw.com 6

TODAY’S PANEL

JOHN M. GRAND

Partner , Vinson & Elkins LLP

WILLIAM L. WALLANDER

Partner , Vinson & Elkins LLP

Dallas, TX

+1.214.220.7866

[email protected]

Dallas, TX

Head, Restructuring & Reorganization

Practice Group

+1.214.220.7905

[email protected]

C. MARK BRANNUM

Vice President, General Counsel

and Secretary, Jonah Energy

Denver, CO

+1.720.577.1000

[email protected]

http://www.velaw.com/


DISCUSSION TOPICS

Issues Related to Certain Midstream and Upstream Contracts 20

Industry Headwinds 4

Out-of-Court Acquisitions from Distressed Sellers 6

Bankruptcy Process Overview 13

363/Plan Sales 16

This communication is provided by Vinson & Elkins LLP for

educational and informational purposes only and is not

intended, nor should it be construed, as legal or tax advice.



Industry Headwinds



INDUSTRY HEADWINDS

“The number of energy loans labeled as “classified,” or in danger of default, is on course to

extend above 50% this year at several major banks, including Wells Fargo & Co. and Comerica Inc.,

according to bankers and others in the industry.”

Source: The Wall Street Journal, “Coming to the Oil Patch: Bad Loans to Outnumber the Good”

Source: The Wall Street Journal

Select Oil and Gas Bankruptcy Filings of 2016

Filing Date Debtor

7/27/2016 Halcon Resources Corporation

7/27/2016 Atlas Resource Partners, L.P.

6/30/2016 Triangle Petroleum Corporation

6/2/2016 Warren Resources, Inc.

5/16/2016 Breitburn Energy Partners L.P.

5/16/2016 SandRidge Energy, Inc.

5/12/2016 Penn Virginia Corporation

5/11/2016 LINN Energy, LLC

5/9/2016 Chaparral Energy, Inc.

4/30/2016 Midstates Petroleum Company, Inc.

4/29/2016 Ultra Petroleum Corp.

4/15/2016 Goodrich Petroleum Corporation

4/14/2016 Energy XXI Limited

3/27/2016 Southcross Holdings LP

2/14/2016 Paragon Offshore Plc



Out-of-Court Acquisitions from Distressed Sellers



• Benefits

– Faster than bankruptcy sales

– Customary allocation of liabilities and pre- and post-effective time expenses

– General diligence period and adjustment for title and environmental defects, casualty losses, etc.

– No court approval required

• Risks/Downside

– Fraudulent Transfer Risks / Avoidable Preferences

– Acquisition is not “free and clear” of existing liens, claims and encumbrances

– PSA Considerations

o If seller files for bankruptcy after signing but before closing, Buyer may be stuck with a “hanging” PSA that

Seller can reject as an executory contract

o If seller files for bankruptcy after closing, Buyer may be left with unenforceable indemnities and no post-

closing recourse; prepetition unsecured claims against debtor seller

– Must comply with anti-assignment provisions, consent rights and rights of first refusal

OUT-OF-COURT ACQUISITIONS FROM DISTRESSED SELLERS

(PRE-BANKRUPTCY)



• Pre-bankruptcy transactions may be avoided as a “fraudulent transfer” or “fraudulent

conveyance”

• Federal and State Look-Back Period

– Federal look-back period: 2 years

– State look-back period: usually longer (TX: 4 years)

• If transaction is determined to be a fraudulent transfer:

– Trustee has the power to (1) recover assets from the Buyer or (2) recover the full value of the

assets from the Buyer (e.g., the value of the assets at the time of transfer less than what was

actually paid)

– Remedies of Buyer

o “Good faith” Buyers are entitled to a lien on the assets to secure the value of any improvements made by the

Buyer after the initial closing

o If Debtor in possession or Trustee recovers the assets, Buyer has a claim for damages/recovery of purchase

price – typically a general unsecured claim

o If PSA has not closed, Buyer can seek return of deposit

‒ Note: Even though assets may be returned to the Debtor in possession or Trustee, Buyer may

remain liable for unavoidable obligations (such as plugging and abandonment, credit support,

environmental obligations, etc.) by virtue of closing the avoided transaction and/or entering the

chain of title

AVOIDANCE OF TRANSACTIONS -- FRAUDULENT TRANSFER



• Actual Fraud: Transfers “with actual intent to hinder, delay, or defraud” a creditor

• Constructive Fraud: Debtor received less than a “reasonably equivalent value” and

debtor:

– was insolvent at the time, or as a result of, the transfer;

– made the transfer, or incurred such obligation, to or for the benefit of an insider, under an

employment contract and not in the ordinary course of business;

– was engaged, or was about to engage, in business or a transaction for which any property

remaining with debtor was “unreasonably small capital” (this prong is applicable in TX but not

other states); or

– intended to, or believed that debtor would, incur debts that would be beyond debtor’s ability to pay

such debts as they mature (this prong is applicable in TX but not other states).

• Defense to Constructive Fraud: Transferee acted in “good faith” and the transfer was

“for reasonably equivalent value”

AVOIDANCE OF TRANSACTIONS -- FRAUDULENT TRANSFER (CONT’D)



• Possible mechanisms to mitigate risk that seller files for bankruptcy between sign/close:

– Risk that seller rejects PSA

o Consider requiring the payment of an upfront work fee

– Risk of “hung” PSA

o Draft outside date so that the PSA automatically terminates at a certain date unless buyer elects to extend

o No deposit or deposit in escrow

– Risk of auction process

o Consider whether Seller can grant Buyer exclusivity

o If seller (or bankruptcy court) require an auction, require seller to name buyer as the stalking horse

• Possible mechanisms to mitigate risks with seller filing for bankruptcy after closing:

– Risk of fraudulent transfer risks/avoidable preferences

o Include seller reps on solvency; marketing efforts; use of proceeds; and PSA is in good faith and arms-length

o Solvency / fairness opinions

o Include covenants requiring seller to maintain / provide records on marketing efforts

– Risk that seller rejects PSA (i.e., terminates indemnity provisions)

o Require a post-closing escrow or a holdback for indemnity claims

PSA PROTECTIONS



• In lieu of a bankruptcy process, seller could attempt an out-of-court restructuring with its

creditors

– PSA Provisions:

o Include appropriate representations on restructuring agreements to the extent available at signing

o Closing condition regarding prior or simultaneous consummation of restructuring

o To extent appropriate, require lien releases from holders of all lienable claims (not just those attributable to

debt)

o Obtain releases from creditors who agree to the restructuring, including with respect to fraudulent conveyances

o Consider staging the delivery of the deposit to coincide with certain restructuring milestones (e.g., deposit paid

once definitive restructuring agreements are executed)

– Determine the other constituents that will be required to approve the PSA, and decide when to

engage them in the process

OUT-OF-COURT RESTRUCTURINGS



• Assess creditworthiness of the Seller

• Analyze fraudulent conveyance risks

– Document scope of marketing / sales process

– Consider obtaining third party solvency, valuation and/or fairness opinions

– Document valuation methodology and price negotiations

• Key PSA considerations:

– No deposit or deposit in third party escrow account

– Hold backs, escrows, parent guaranties or other credit support for indemnities and PSA

obligations

– First priority liens on seller’s assets (applicable to JV transactions)

– Draft to guard against seller’s ability to reject or accept specific agreements (e.g., include key

provisions all in one agreement)

KEY TAKEAWAYS



Bankruptcy Process Overview



• Types of Bankruptcy Filings

– Chapter 7 (liquidation)

– Chapter 11 (reorganization)

• Summary of Chapter 11 Bankruptcy Case

– Case commencement (voluntary vs. involuntary)

– First day hearings (ensure smooth transition into bankruptcy case)

– Automatic stay (federal injunction)

– DIP financing/cash collateral (estate funding)

– Lien priority issues (collateral gaps, M&M lienholders)

BANKRUPTCY PROCESS OVERVIEW



• Certain key issues in Chapter 11 Bankruptcy Case

(cont’d)

– Executory contracts (JOAs, leases, other)

– Asset sales

– Treatment of prepetition claims (vendors)

– Disclosure statement and plan of reorganization

(solicitation & voting effectuates reorganization or other

restructuring transaction and discharge of debts)

o Classification of claims (must be substantially similar to other

claims in class, possibility for separate classification of

substantially similar claims in some circumstances)

o Voting (acceptance is 2/3 in dollar amount and 1/2 in number of

allowed claims in class)

– Post-confirmation activities

– Preferences (unwinding preferential transfers)

– Fraudulent transfers (actual vs. constructive, value issues)

– A transaction may be implemented through a Chapter 11

plan (including by purchasing secured or unsecured debt)

or outside a plan pursuant to section 363 of the Bankruptcy

Code

BANKRUPTCY PROCESS OVERVIEW (CONT’D)



363/Plan Sales



UNIQUE ASPECTS OF A 363 SALES TRANSACTION

• Chapter 11 case can involve a sale of assets outside a Chapter 11 plan

• Stalking horse bidder – bidder that subjects proposal to topping bids and subject to

court approval

– Debtor conducts initial marketing process to find a stalking horse bidder

– Stalking horse PSA is typically executed and attached to initial motion

– Bid protections (1-3% of transaction amount) and expense reimbursement

– Minimum bid increments

– Lenders may be the stalking horse bidder through a credit bid

• 363 Sale PSA

– Highly negotiated

– Effective Date purchase price adjustments

– Treatment of title and environmental matters

– Minimal reps and warranties

– Closing Conditions

– Limited post-closing recourse

– Key stakeholders and other parties in contest may object to sale

– Subject to court approval



UNIQUE ASPECTS OF A 363 SALES TRANSACTION (CONT’D)

• Treatment of executory contracts

– Debtors may assume and assign certain contracts to purchaser

– Cure costs

– Assignment limited by applicable law

– Dealing with pref rights

• Auction process

– Additional marketing process to find bidders at the auction

– Determination of qualified offers and court approved bidding procedures to govern process

– Auction conducted

– Winner signs up PSA with debtor, bankruptcy court approves transaction

– Closing / backup bidder

• “Free and clear”

– Interaction with applicable state law, federal law, tribal law

– Oil and gas leases and royalty obligations under state law

• Dealing with debtor's main creditor groups (secured creditors/committees of

unsecured creditors)



PLAN SALES

• Process steps for bidding/auction similar to 363 sale

• Run process side by side plan of reorganization

• Plan can be a sale plan or a proceeds distribution plan

• Sale under the plan itself (direct asset sale, synthetic sale)

• Sale prior to plan, plan to distribute proceeds

• Direct distributions

• Plan trust distributions/waterfall

• Synthetic sale

• Cancel equity

• Issue new equity to purchaser via 1145 or securities exemption

• Purchased assets vest in reorganized debtor

• Excluded assets vest in liquidating trust

• Can be useful to avoid need to file numerous assignments, consent rights, pref

rights



Issues Related to Certain Midstream and Upstream Contracts



• Gathering and Processing Agreements (GPAs)

– Impact of bankruptcy filing / Automatic Stay

– Rejection / Assumption of GPAs

– Dedications and volume commitments

– Covenants running with the land

– Lien Priority and other security

– Restrictions on assignment in GPAs

KEY CONTRACTS



• Joint Operating Agreements

– Removal of operator

– Impact on continuing operations

– Advanced funds, JIBs and production revenue

– Non-consent penalties

– Covenants running with the land

– JOA lien, lien priority and default provisions

KEY CONTRACTS



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Section 363 Sales in Oil & Gas Bankruptcies: Purchasing ...media.straffordpub.com/products/section-363-sales-in-oil-and-gas... · 04/10/2016 · Select Oil and Gas Bankruptcy Filings