Distressed Oil & Gas Financing

Transcription

1 Distressed Oil & Gas Financing A GREAT DISTURBANCE IN THE FORCE Tara Flume Senior Associate Jason A. Schumacher Partner Atlanta Austin Boston Chicago Dallas Hartford Hong Kong Houston Istanbul London Los Angeles Miami Morristown New Orleans New York Orange County Providence Sacramento San Francisco Stamford Tokyo Washington DC West Palm Beach 2015 Locke Lord LLP What We Will Discuss Today. 1. Facts about the Existing Capital Landscape 2. that Are Coming 2 1

2 Facts about Locke Lord LLP Around 1000 attorneys across the world ~ approximately 375 attorneys in Texas. One of the largest dedicated groups of oil and gas attorneys in the U.S. We represent wide range of clients in the energy industry from publicly traded and privately-held oil, gas and midstream companies to banks and other financial institutions providing debt or equity to oil and gas companies, including individual and mineral owners

3 Facts About Me I have been married for almost 16 years We have three kids who are 14, 11 and 8 My 11-year middle son Johnny is autistic and is awesome I attended Abilene Christian University for undergrad and The University of Texas School of Law for law school I am huge Texas Rangers fan and I also enjoy boxing glad I can now combine the two I coach youth sports and loved playing sports Dominating basketball career Facts About Me I thoroughly enjoy the oil and gas business Past Chair of the Energy Law Section of the Dallas Bar Association Board Member and Past President of the Texas Energy Council 28 th Annual Symposium was held on May 12 th at the George Bush Institute I am a LinkedIn user go ahead and connect with me 3

4 Facts About Me I received a B.A. in English from Texas A&M University and my J.D. from Southern Methodist University School of Law. I am on the Board and serve as an officer of Women s Energy Network North Texas. I am licensed to practice law in both Texas and North Dakota. 7 Current Landscape The Lambs and the Wolves Lambs Distressed Oil and Gas Companies Wolves Those with Cash Hunting the Lambs Shepherds Bankruptcy Judges 4

5 Current Landscape The Lambs 90 E&P companies have filed for bankruptcy in Biggest this year: Linn, Halcón, Breitburn and Sandridge Total debts equaling $66,537,478, (secured and unsecured) Current Landscape The Wolves Cash rich oil and gas companies Private equity Mezzanine debt providers Foreign investors 5

6 Current Landscape The Shepherds Bankruptcy courts Increasing number being filed in Texas but many filed in Delaware and New York What We Will Discuss Today. 1. Facts about the Existing Capital Landscape 2. that Are Coming 12 6

7 Prior to bankruptcy After bankruptcy Prior to bankruptcy Merger Asset Sale Non-core Asset Sale Liquidation Equity Raise Public and Private Gathering Financing 7

8 Merger Range Resources Memorial Development Whiting Petroleum Kodiak Oil and Gas Noble Energy Rosetta Resources Merger Key to the deals a HUGE debt assumption by the surviving party to the mergers No financing needed because they were all stock Healthy balance sheet required of survivor Can be private companies as well 8

9 Prior to bankruptcy Merger Asset Sale Non-core Asset Sale Liquidation Equity Raise Public and Private Gathering Financing Asset Sale Non-Core Bigger companies divesting areas that they do not like as much as other areas Higher drilling cost/lifting cost Lack of knowledge of area Non-contiguous acreage 9

10 Asset Sale Non-Core Buyers for Non-Core - All the Wolves Cash rich oil and gas companies Private equity Mezzanine debt providers Foreign investors Asset Sale Non-Core Buyers for Non-Core - All the Wolves Cash rich oil and gas companies Private equity Mezzanine debt providers Foreign investors 10

11 Asset Sale Non-Core Buyers for Non-Core - All the Wolves Cash rich oil and gas companies Private equity Mezzanine debt providers Foreign investors Asset Sale Non-Core Private Equity 100 s of PE-backed E&P companies are canvassing the marketplace All have access to normally $100 s of millions 11

12 Asset Sale Non-Core Private Equity Typical acquisition deal capital structure: PE firm puts up 30% - 50% of acquisition capital PE-backed E&P company borrows the rest from bank relationship of PE-firm very normal 1 st lien lending relationship Asset Sale Non-Core Private Equity What is going on? Is the typical deal structure achievable? Not really but maybe Most PE firms banks are not lending Exceptions can be made though 12

13 Asset Sale Non-Core Buyers for Non-Core - All the Wolves Cash rich oil and gas companies Private equity Mezzanine debt providers Foreign investors Asset Sale Non-Core Mezzanine Debt Providers What is it? Loans with a kicker Equity in the company Override Net profits interest Oftentimes can be second lien 13

14 Asset Sale Non-Core Mezzanine Debt Providers Mezz debt would not buy assets Mezz funded companies would Some companies do not want private equity money Mezz allows companies to keep control Asset Sale Non-Core Buyers for Non-Core - All the Wolves Cash rich oil and gas companies Private equity Mezzanine debt providers Foreign investors 14

15 Asset Sale Non-Core Foreign Investors Continued interest in many marketplaces Challenges are hard to deals closed Some not willing to pay premiums Prior to bankruptcy Merger Asset Sale Non-core Asset Sale Liquidation Equity Raise Public and Private Gathering Financing 15

16 Asset Sale - Liquidation Companies can effectively go out of business without bankruptcy if they can sell assets for more than their debts Equity-backed companies whose asset value are far less than equity investment are usual suspects Asset Sale - Liquidation Many of these deals will look for purchase price kickers If commodity price goes to $60/barrel for a month, then Buyer will pay Seller $X These arrangements help heal the wound of management teams and equity providers selling low 16

17 Asset Sale - Liquidation Purchase price kickers can often be tricky Buyer s lenders do not like them and oftentimes talks of intercreditor commence Need competent counsel to structure these Prior to bankruptcy Merger Asset Sale Non-core Asset Sale Liquidation Equity Raise Public and Private Gathering Financing 17

18 Equity Raise Public and Private Lots of interest in oil and gas Passive investors are interested in buying low IPO s tricky Private placements still can move Prior to bankruptcy Merger Asset Sale Non-core Asset Sale Liquidation Equity Raise Public and Private Gathering Financing 18

19 Gathering Financing Midstream company and E&P company enter into long-term gathering arrangements Midstream company pays E&P $X at closing Fixed gathering fees with adjustment up for inflation Dedicated acreage Volume commitments Gathering Financing What about this Sabine case? Does this still work? Answer is yes Risk on midstream company that E&P company files for bankruptcy and bankruptcy court agrees to reject gathering agreement Volume commitments and dedication are eliminated 19

20 Gathering Financing The decision in Sabine was issued by a New York bankruptcy court Many observers feel a Texas bankruptcy court would rule differently There is also a hope that the Texas Supreme Court will issue a ruling that these kinds of gathering agreements run with the land and therefore bankruptcy courts would rule the same. Prior to bankruptcy After bankruptcy 20

21 After bankruptcy 363 sales DIP financings 363 Sales What are they? What are the advantages? How do they work? Who would do these? 21

22 363 Sales What are they? What are the advantages? How do they work? Who would do these? 363 Sales What are they? 363 refers to a section in the US bankruptcy court This section allows for a sales process by bankrupt companies to third parties without getting reorganization plan approved 22

23 363 Sales What are they? What are the advantages? How do they work? Who would do these? 363 Sales What are the advantages? Free and clear of liens and claims Assumption of less liability of bankrupt seller than normal merger Ability to bind debtor without requirements to get stockholder approval Ability to pick and choose contracts included in the sale 23

24 363 Sales What are they? What are the advantages? How do they work? Who would do these? 363 Sales How do they work? Buyer is picked called a stalking horse Buyer and Seller sign asset purchase agreement Buyer posts escrow deposit Seller files with bankruptcy court a notice for a hearing for bidding procedures and auction procedures to be approved Seller notifies relevant parties with an interest in the sale (i.e. creditors) 24

25 363 Sales How do they work? Creditors can object to the bidding procedures Bidding and auction process moves forward Seller has a hearing with bankruptcy court to approve sale creditors have a right to object to sale 363 Sales What are they? What are the advantages? How do they work? Who would do these? 25

26 363 Sales Who would do these? The Wolves Cash rich oil and gas companies Private equity Mezzanine debt providers Foreign investors LESS COMPETITION THOUGH After bankruptcy 363 sales DIP financings 26

27 DIP Financings What are they? How do they work? DIP Financings What are they? How do they work? 27

28 DIP Financings What are they? DIP stands for Debtor in Possession Simply means a Chapter 11 over a Chapter 7 Typical DIP financing terms include a first priority security interest, a market or even premium interest rate, an approved budget, and other lender protections DIP Financings What are they? How do they work? 28

29 DIP Financings How do they work? Debtor wants to borrow funds secured by a lien equal or senior to the existing lender (often called "priming" the existing lender) The company either will need the existing lender to consent or will have to convince the Bankruptcy Court that the existing lender s lien position will be "adequately protected" DIP Financings How do they work? If the Bankruptcy Court gives approval to a DIP loan and finds that the loan was made in good faith, the new DIP loan will no longer be subject to legal challenge. Stated differently, with bankruptcy approval, a loan that could have been challenged outside of bankruptcy will not be subject to the same challenge. That s true even if the lender is an insider or a "stalking horse purchaser" seeking to buy the company s assets. 29

30 Jason Schumacher Tara Flume Locke Lord LLP Find us on LinkedIn or lockelord.com 59 30