The oil and gas industry is no stranger to market headwinds and unpredictable business cycles. However, the uncertainty of the COVID-19 pandemic and the Russian-Saudi price war have sent crude to record lows and rapidly intensified the financial hardship of many oil and gas companies. The depressed prices and lower demand forecasts have led most US producers to make deep budget cuts and will force others into bankruptcy in potentially greater numbers than what we saw in 2015. That year, 69 companies filed for bankruptcy protection. To add insult to injury for at-risk companies, lay-offs and furloughs will deprive resources allocated day-to-day functions, including maintaining assets and records.
Whether your company is facing bankruptcy, or a joint venture partner is at-risk of insolvency, the value of leases and wells can be protected by taking critical measures to secure title and perfect liens as early as possible. Diligent preparation may not only prevent a loss of assets, but reduce the expense of resolving title issues after you petition the court for protection. While every case is unique, the following addresses some key considerations and action items for title and lien perfection if bankruptcy is on the horizon for a non-operator or JV partner.
Understanding Lien Priority
Non-Operator’s Assets in Bankruptcy?
We strongly recommend that our clients and their advisors take a few simple steps now to protect any joint venture oil and gas assets subject to joint operating agreements (“JOAs”), farm out agreements, pooling agreements and the like, in the event a counterparty (such as an operator) to these agreements files for bankruptcy.
In order to preserve joint venture assets in the case of a bankruptcy filing, contractual agreements such as JOAs, must be recorded in each county where the subject assets are located. In addition, a UCC-1 should be filed with the Secretary of State where the counterparty is incorporated. If a JOA or similar agreement was never recorded on behalf of a non-operator (e.g. your company), and a counterparty (e.g. operator) to the agreement files for bankruptcy, then the non-operating party will be deemed an unsecured creditor and will join the pool of all other unsecured creditors who typically do not get paid, or only recover a nominal amount of their investment. However, if the agreement was properly recorded and perfected, the non-operating party will have a secured lien which will be paid through bankruptcy in the order of priority in which it was recorded.
Protect Your Obligations
Already a Party to a Bankruptcy Proceeding?
What happens when a well or lease you hold an interest in becomes part of the assets in bankruptcy and the bankrupt party that normally pays production payments and royalties is no longer able to do so? Is your company contractually liable under the terms of those agreements for nonpayment? Can your company lose the lease or well interest because of this? We can help you determine the impact of assets held in bankruptcy, or provide the relevant title documentation to your legal counsel to determine an appropriate course of action.
Identify Your Risk
Take these steps to protect your assets:
- Review all JOAs, farmouts, pooling agreements and other similar agreements with any third-party partners.
- Determine which agreements are properly recorded.
- Make sure any new leases or renewal leases have been properly assigned from the operator.
- Ensure that all leases and agreements are being extended or renewed by the contractually obligated party on acreage with undeveloped reserves allocated to those lands.
- Determine if you have UCC-1s filed in the appropriate states.
- Talk to your accounting department – are any of your partners behind on their JIB payments or cash calls? Look for a history of late payments over the past 3 – 6 months.
- Confirm that revenues due to your company are being paid correctly based on volumes produced and your net revenue interest, and that reserves are not being held in suspense.
- Research your agreement partners’ financial filings and activities over the past 6 months and identify those who are at risk.
- Talk to your legal and financial advisors about protecting your assets.
Protect Your Assets
How Cinco Energy can help.
The longer you wait to perfect your filings, the greater the risk becomes of losing asset value in a bankruptcy filing. We help quickly mitigate this risk and protect the value of your holdings. As described in the list above, some of the key steps include taking an inventory and identifying any third-party agreements, determining if they are properly recorded, and if not, recording memorandums of those agreements. It is also recommended to identify potential at-risk partners who may be likely to file for bankruptcy this year. We often collaborate with lending institutions, and their counsel, to determine if at-risk companies have additional unsecured assets that can be collateralized.
Contact us to discuss your concerns, and how to best address your company’s title exposure to counterparty bankruptcies.