The arrival of the billion dollar oil and gas cases
One does not have to be an industry analyst to recognize that many oil and gas exploration and production companies (known as “E&P companies”) experienced financial difficulties in 2015. Nor is the original cause of the problem unknown. Starting in 2005, the use of hydraulic fracturing (also known as “fracking”) combined with horizontal drilling, facilitated a boom in the oil and gas production in the United States. Meanwhile, even though the United States was becoming more hydrocarbon independent than ever before, Saudi Arabia and other OPEC nations did not reduce their own production. The boom ultimately turned into a bust. The price of oil decreased from over $100/bbl in mid-2014 to under $35/bbl today. Depressed sale prices meant that many E&P companies could not support the costs associated with maintaining their capital-intensive fracking operations. New production decreased at an unprecedented rate. The result: over 40 E&P bankruptcy filings in 2015. Of these companies, five E&P companies had debt obligations greater than $1 billion. Those billion dollar filings are the focus of this article.
Overview of the Largest E&P Filings of 2015
What can we learn from the billion dollar E&P bankruptcy cases of 2015? The majority of these E&P companies have the majority of their assets in Texas. Nevertheless, not unlike other non-E&P mega-bankruptcy cases, the preferred venue for these E&P filings was Delaware, where three of the five bankruptcy filings took place. The cause of the bankruptcy filings was, for the most part, the same: substantially decreased oil and gas prices. The industry is particularly sensitive to hydrocarbon price fluctuations given that many E&P company loans are tied to the value of estimated hydrocarbon reserves; thus, a decrease in the market price of hydrocarbons will decrease an E&P company’s borrowing base. Reserve bases are analyzed and recalculated two times a year.
What is also nearly unique to the E&P industry is how difficult it can be to fully perfect secured claims as the types of assets are different, and so too are the locations of those assets. The latter fact is important because different states have different perfection requirements. To add additional confusion, applicable state laws are not even consistent on seemingly basic oil and gas interest legal concepts. For example, is an oil and gas lease a real property right or a personal property right? The answer depends on which state the lease is in. This is important because real property rights must be perfected in local land records while most other rights are perfected by a filing with the applicable state’s secretary of state. Given that E&P companies often have hundreds or thousands of hydrocarbon leases located in different states, a lender may face substantial hurdles that make perfecting a loan very complicated, and thus ripe for missteps.
As explored below, perfection issues have been raised in the majority of 2015’s billion dollar E&P cases, including Quicksilver, Sabine, and Magnum Hunter. What was surprising is the outcome in the one instance (Quicksilver) where certain of the issues were fully litigated: the court found that the senior lenders were properly perfected.
Valuation is also an issue in many of the five cases. In Samson, for example, the creditors’ committee argued that the assets were worth less than the debtors and second lien holders asserted, meaning the second lien holders are not secured at all. If successful, the result would be that certain assets are no longer encumbered and thus inure to the benefit of general unsecured claimants. Meanwhile, the second lien claims related to the now unencumbered assets become general unsecured claims, to the great dismay of the second lien lenders. In contrast, the court in Magnum Hunter is faced with a more frequently seen valuation argument: the equity holders assert that the value of the company is worth more than the debt and thus that they are entitled to share in some of the reorganized company’s value.
A detailed analysis on each of the 2015 billion dollar E&P cases follows, in order of bankruptcy case filing (earliest to latest).
On March 17, 2015, Quicksilver Resources filed for bankruptcy in the Delaware. Quicksilver’s primary assets were located in Texas and Canada, although its Canadian subsidiaries have not yet filed for bankruptcy. At the petition date, Quicksilver had approximately $2.1 billion of debt, including approximately $140 million of first lien debt and $825 million of second lien debt. As noted above, one of the more interesting events in the Chapter 11 case was the committee’s challenge of part of the second lien lenders’ allegedly secured interests. Ultimately, the court found that the second lien lenders were properly secured on the disputed assets. With this issue resolved, the debtors can now move forward with proposing a plan of reorganization.
Sabine Oil & Gas
On July 15, 2015, Sabine Oil & Gas filed for bankruptcy in the Southern District of New York. What makes Sabine unique is the fact that the company was created by a merger completed only seven months prior to the bankruptcy filing. The merger clearly was not a success. The debtors’ approach to dealing with merger issues was a forceful one: it brought litigation related to the merger on the first day of its bankruptcy case. The creditors’ committee is now seeking to take over the litigation and supplement it with new and expanded claims. The court has recently directed the main case parties to mediation.
Samson Resources Corporation
On September 16, 2015, Samson Resources Corporation filed for bankruptcy in the District of Delaware. Although years had passed since the massive ($7.2 billion) 2011 leveraged buy-out for this company, the company was still burdened with massive debt when it filed for bankruptcy, including $950 million in a senior secured resolver, $1 billion in second lien debt and $2.25 billion in unsecured debt. A proposed RSA which sought to reallocate a majority of the equity to the alleged fulcrum security (the second lien lenders) was quickly contested by unsecured creditors. The committee alleged that the encumbered value of the company was not sufficient to provide any recovery to second lien lenders and thus the second lien lenders must be treated as unsecured claims. As of press time for this article, it is unclear what compromises might be reached to allow the parties to move forward toward reaching a consensual plan.
Energy & Exploration Partners, Inc.
On December 7, 2015, Energy and Exploration Partners, Inc. filed for voluntary bankruptcy in the Northern District of Texas. This followed an involuntary filing by a group of trade creditors in November who may have been seeking to select their choice of venue (Texas) for this bankruptcy case. While the case is still in its relative infancy at press time for this article, there are clear disputes between (a) the senior secured notes (approximately $750 million outstanding) and (b) certain noteholders who own convertible notes ($375 million outstanding) as well as senior note. The latter group is often referred to as “cross-over” holders.
Magnum Hunter Resources Corporation
On December 15, 2015, Magnum Hunter Resources Corporation filed for bankruptcy in the District of Delaware. Unlike many other E&P bankruptcy filings, including the other four cases noted in this article, this filing appears to be less contested among the creditors. In fact, the debtors may be required to deal with an official committee of equity holders, a very rare appointment in a chapter 11 case that is only appropriate if the value of a company exceeds the company’s aggregate debt. A large percentage of the debt has already agreed to an RSA that proposes to distribute 100% to first lien creditors, 72% to second lien creditors and 33% to senior noteholders.
Douglas Deutsch is a partner in Chadbourne & Parke’s New York Office in the firm’s bankruptcy and financial restructuring group.