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Distressed Oil & Gas Asset Sales
September 2016
Parsons Behle & Latimer Newsletter

The current oil and gas “bust” has raised a number of issues that customers and creditors of distressed oil and gas exploration and production (“E&P”) companies must be aware of, particularly as E&P companies are shedding assets, seeking forbearance agreements from creditors and filing Chapter 11 bankruptcy. E&P companies have always been prime candidates for Chapter 11 bankruptcy for a number of reasons, including, but not limited to: cyclical commodity prices ($27 bbl oil or $2.00 kl gas will shake the financial foundations of even the proven E&P companies); the high cost of exploring and producing oil and gas; taking on too much debt; and the lure of high returns while over exposing the company to high levels of risk. These factors have led to a slew of Chapter 11 filings by E&P companies in the past months, a trend that is expected to continue for the foreseeable future even with price of crude generally trending upward.

For the highly leveraged E&P company that has determined it does not have sufficient liquidity to fund a reorganization outside of the bankruptcy courts, Chapter 11 of the bankruptcy code can provide a means to complete a quick sale of some or all of the company’s assets. A primary method to accomplish a “clean” asset sale under Chapter 11 is through a so-called 363 sale. This references section 363 of the bankruptcy code, 11 U.S.C.§ 363, which allows the bankruptcy trustee or debtor-in-possession, with bankruptcy court approval, to sell some or all of the company’s assets free and clear of liens, claims and interests.

A section 363 sale typically requires some form of competitive bidding, an auction of the assets or some form of exposure of the assets to the market in order to ensure fair value is being received. One of the benefits for distressed companies (and, arguably, drawbacks for creditors) of a sale of assets under section 363 is that it can be accomplished on an expedited basis. To accomplish the sale, the debtor must file a motion for authorization of the sale, which is typically filed on the first day of the case, and the bankruptcy court must hold a hearing on the motion. In evaluating whether to approve the 363 sale, most courts apply a “business judgment test,” under which the court will determine whether the sale makes sound business sense. This process generally takes in the range of 45 to 90 days to finalize. If the asset sale is accomplished through a plan of reorganization, confirmation of a Chapter 11 plan involves a more complicated and typically more time-consuming process.

As oil & gas prices continue to be highly volatile, we will no doubt see more and more E&P companies filing for bankruptcy protection and more assets sold through the 363 sale process.  If you are creditor, a mechanic lienholder or vendor of a distressed E&P company, it is extremely important to seek advice of counsel early. The bankruptcy process moves quickly and your rights could be negatively impacted by a failure to timely object.

For additional information, please contact Bruce White.