Oil and Gas Industry Update:
Current Market Trends and Recent
Developments in Oil and Gas Law
Adam Dempsey and Stephen Boone
Topics Covered
• Oil and Gas Industry Update
• Case Law Update
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Oil and Gas Industry Update
• Current Industry Trends
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Financing implications
Storage implications
Production implications
Transaction implications
Pricing implications
Completion implications
Regulatory implications
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Financing Implications
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Borrowing base deficiencies
Need for covenant relief
Increased need for liquidity
Bankruptcy
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Borrowing Base Deficiencies
• RBL
• reserve based loan
• common form of debt financing for non-investment grade
upstream companies
• credit facility governed by a borrowing base
• borrowing base tied to present value of oil and gas reserves
• Spring 2015 borrowing base redeterminations resulting in
many deficiencies
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Covenant Relief
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Typical RBL financial covenant = leverage ratio
Leverage ratio = debt:EBITDA
Market = ~4.00:1.00
As prices decline and earnings fall, many borrowers
are asking for temporary relief
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Covenant Relief Trends
• Removal or temporary suspension of leverage ratio
• Addition of:
• Secured leverage ratio
• Interest coverage ratio
• Increased pricing
• Tightening of debt baskets
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Covenant Relief Examples
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Gastar Exploration Inc. (GST)
Legacy Resources, LP (LGCY)
Rosetta Resources Inc. (ROSE)
Clayton Williams Energy Inc. (CWEI)
EXCO Resources, Inc. (XCO)
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GST
• Market cap (as of April 9, 2014) = $230.39MM
• Stock price:
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June 30, 2014 - $8.71
September 30, 2014 - $5.87
December 31, 2014 - $2.41
March 31, 2015 - $2.67
• Asset location: Marcellus and Hunton Limestone
• Current borrowing base: $50MM
• Agent bank: Wells Fargo
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LGCY
• Market cap (as of April 9, 2014) = $763.38MM
• Stock price:
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June 30, 2014 - $31.24
September 30, 2014 - $29.68
December 31, 2014 - $11.43
March 31, 2015 - $10.12
• Asset location: Permian Basin, Mid-Continent and
Rocky Mountain
• Current borrowing base: $700MM
• Agent bank: Wells Fargo
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ROSE
• Market cap (as of April 9, 2014) = $1.5B
• Stock price:
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June 30, 2014 - $54.85
September 30, 2014 - $44.56
December 31, 2014 - $22.31
March 31, 2015 - $17.02
• Asset location: South TX (including Eagle Ford)
and Southern Alberta Basin (Northwest MT)
• Current borrowing base: $800MM
• Agent bank: Wells Fargo
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CWEI
• Market cap (as of April 9, 2014) = $651.22MM
• Stock price:
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June 30, 2014 - $137.37
September 30, 2014 - $96.45
December 31, 2014 - $63.80
March 31, 2015 - $50.63
• Asset location: LA, NM, and TX
• Current borrowing base: $500MM
• Agent bank: JPMorgan
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EXCO
• Market cap (as of April 9, 2014) = $550.30MM
• Stock price:
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June 30, 2014 - $5.89
September 30, 2014 - $3.34
December 31, 2014 - $2.17
March 31, 2015 - $1.93
• Asset location: East TX, North LA, Appalachia, and
Permian Basin
• Current borrowing base: $900MM
• Agent bank: JPMorgan
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Leverage Ratio
• GST – increased from 4x to 5.25x until 06/30/2016
and then gradual step down to 4x
• LGCY - removed
• ROSE - removed
• CWEI – temporarily suspended until 06/30/2016
• EXCO – increased from 4.5x to 6x until 12/31/2016
and then gradual step down to 5.25x
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Senior Leverage Ratio
• Leverage Ratio vs. Senior Leverage Ratio
• Leverage Ratio = debt:EBITDA
• Senior Leverage Ratio = senior (secured) debt:EBITDA
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Senior Leverage Ratio – Cont’d
• GST – added (senior secured) at 2.25x with step-up
to 4x
• LGCY – added (senior secured) at 2.25x
• ROSE – added (senior secured) at 2.5x
• CWEI – added (senior secured) at 2.5x until
06/30/2016
• EXCO – added (senior secured) at 2.5x
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Interest Coverage Ratio
• Interest Coverage Ratio = EBITDA:Interest Expense
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Interest Coverage Ratio – Cont’d
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GST – decreased from 2.5x to 2x until 03/31/2016
LGCY – added at 2.5x
ROSE – added at 2.5x
CWEI – added at 1.5x until 06/30/2016
EXCO – added at 2x
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Increased Need for Liquidity
• Cash needed to
• pay down borrowing base deficiency; and
• fund ongoing operations
• Several sources of additional capital
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Sources of Additional Capital
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High Yield Notes
Term Loans
Sale of non-core assets
Hedge monetization
Private equity
Public equity
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High Yield Notes
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High Yield Notes – Cont’d
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Sale of Non-Core Assets
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Sale of Non-Core Assets – Cont’d
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Sale of Non-Core Assets – Cont’d
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Sale of Non-Core Assets – Cont’d
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Hedge Monetization
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Hedge Monetization – Cont’d
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Hedge Monetization – Cont’d
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Private Equity
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Private Equity – Cont’d
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Public Equity
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Production/Storage Implications
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Production/Storage Implications – Cont’d
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Production/Storage Implications – Cont’d
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Production/Storage Implications – Cont’d
• Oil Storage Futures Contracts
• 7,000 storage contracts will be sold through a 30-minute
online auction
• Each contract = right to store 1,000 barrels of LOOP Sour
crude oil at LOOP’s Clovelly Hub
• After auction, contracts can be bought and sold freely on
the open market
• Trading stops on the third business day prior to the 25th
calendar day of the month preceding the delivery month
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Bankruptcy
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Endeavor International Corp – October 10, 2014
BPZ Resources, Inc. – March 9, 2015
Dune Energy Inc. – March 9, 2015
Quicksilver Resources Inc. – March 17, 2015
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Transaction Implications
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Transaction Implications – Cont’d
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Transaction Implications – Cont’d
• Wave of merger activity among the majors
reminiscent of the late 1990s?
• BP acquired Amoco and Arco
• Chevron merged with Texaco
• Exxon purchased Mobil
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Transaction Implications – Cont’d
• Immediate example…
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Transaction Implications – Cont’d
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Transaction Implications [Noble & Rosetta] – Cont’d
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Transaction Implications [Noble & Rosetta] – Cont’d
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Transaction Implications [Noble & Rosetta] – Cont’d
• Geographic representation (post-merger)
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Pricing Implications
• Oil and gas transactions contingent on buyers and
sellers reaching a relative consensus on the
underlying value of the oil and gas properties
• Inflated or high oil prices create a disparity in which
buyers are hesitant to pay sellers’ high asking price
• Deflated or low oil prices create a disparity in which
sellers are hesitant to accept buyers’ low offer price
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Pricing Implications – Cont’d
• Ask the experts…
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Pricing Implications – Cont’d
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Pricing Implications – Cont’d
• Prolonged volatility in the price of oil and gas makes
acquisitions difficult as sellers may choose to wait for
prices to go up and buyers may choose to wait for prices
to go down or stabilize
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Completion implications
• Drilling and completing a well in tight shale formations
(e.g. the Eagle Ford) involves a number of steps:
• Drilling operations (often more than a mile below ground) (4-6
weeks)
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Drill wellbore in ground with drilling rig
Remove drill pipe and replace with steel casing, pump cement to protect
surrounding strata from wellbore
• Completion Operations (2-3 months)
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Fracing operations begin with a perforating gun in rock layer
Fracing continues with pumping of water, sand and other chemicals (<0.5%)
into the fractured rock, repeated along entire wellbore in horizon
Drill out well plugs from fracturing and recover fluid
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Completion implications – Cont’d
• Delaying completion operations (the “Fracklog”)
• Operators may choose to delay completion operations after
successfully drilling a well to avoid or delay the substantial costs
associated with such completion operations
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50% or more of total cost of the well
2-3 months or more in additional operations
Drive service prices down
May or may not be required to maintain leasehold
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Completion implications – Cont’d
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Completion implications – Cont’d
• Producers are increasingly delaying completion of wells
that have been drilled in the US (adding to the fracklog)
• Rationale: Would you rather pay $5MM to complete Well A to
receive the 10,000 Barrels of oil at $59 or $110 per Barrel?
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Completion implications – Cont’d
• Producers are increasingly failing to complete wells that have been drilled
in the US (adding to the fracklog)
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Incredibly steep decline curve on horizontal, fractured well
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Producers likely quick to jump on completion operations at first sign of higher prices for an
extended period in connection with decreasing service cost (many rigs and crews remain idle and
ready to work)
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Regulatory implications
• Banning fracking bans?
• Historically, it has been common for cities to regulate surface
activities: noise, lights, traffic and setbacks
• However, certain municipalities and cities have taken further
steps and passed ordinances and laws restricting certain oil and
gas operations
• Key example: the city of Denton, Texas voted on an approval in
November 2014 to ban hydraulic fracing within city limits (first
Texas city to do so)
• Operators view as tremendous impediment to production
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Regulatory implications – Cont’d
• Local Control vs Texas Law
• Texas Railroad Commission has regulated oil and gas
development in Texas
• If TRRC allows fracing, may a city prohibit?
• Texas House Bill 40 proposed that gives TXRRC authority to
preempt city laws when it comes to subsurface oil and gas
operations, including fracing
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Regulatory implications – Cont’d
• Texas Law > Local Control
• House Bill 40 sailed through Texas House with a vote of 122-18 in
April 2015
• Without extensive discussion, Texas Senate voted 24-7 to approve
House Bill 40 this past week
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Regulatory implications – Cont’d
• Texas Law > Local Control; Take-aways
• Some cities and environmentalists are concerned that the
legislation adds confusion as to what municipalities can regulate
in regards to ensuring local health and safety
• Oil and gas industry seeking clarity as to development of existing
resources and certainty in new oil and gas leasing ventures
• Consideration: how has the downturn in energy prices and the
resulting strain on oil and gas industry effected the discussion?
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Case Law Update
• In Re: Motors Liquidation Co.
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In Re: Motors Liquidation Co.
• 777 F.3d 100, (2d Cir. 2015)
• Question addressed: Must the secured lender of
record authorize the termination of a particular
security interest that the UCC-3 identifies for
termination, or is it enough that the secured lender
authorize the act of filing a UCC-3 statement that
has that effect?
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In Re: Motors Liquidation Co. - Cont’d
• Players:
• Debtor = Motors Liquidation Company, et al.
• Plaintiff/Appellant = Official Committee of Unsecured
Creditors of Motors Liquidation Company
• Defendant/Appellee = JPMorgan Chase Bank, N.A.,
individually and as administrative agent
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In Re: Motors Liquidation Co. – Cont’d
• Facts
• Two JPMorgan credit facilities:
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(2001) $300MM synthetic lease facility
(2006) $1.5B term loan facility
• Collateral:
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SLF – 12 pieces of real estate
TLF – substantially all of debtor’s assets
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In Re: Motors Liquidation Co. – Cont’d
• Facts – Cont’d
• UCCs filed with DE SOS:
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SLF – UCCs with file nos. 2092532 5 and 2092526 7
TLF – UCC with file no. 6416808 4
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In Re: Motors Liquidation Co. – Cont’d
• Timeline
• September 2008
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General Motors contacted its counsel to prepare release
documentation in connection with payoff
GM’s counsel orders DE SOS lien searches against GM
Lien search results reveals three UCCs (one UCC being the TLF
UCC)
GM’s counsel prepares UCC-3 termination statements for all
three UCCs
GM, GM’s counsel, JPMorgan, and JPMorgan’s counsel review
the draft UCCs
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In Re: Motors Liquidation Co. – Cont’d
• Timeline – Cont’d
• October 30, 2008
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GM pays off SLF
All three UCC-3 termination statements filed with DE SOS
• June 1, 2009
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GM files for Ch. 11 bankruptcy protection
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In Re: Motors Liquidation Co. – Cont’d
• Operative statute: UCC § 9-509(d)(1)
A person may file an amendment other than an amendment that
adds collateral covered by a financing statement or an
amendment that adds a debtor to a financing statement only
if…the secured party of record authorizes the filing…
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In Re: Motors Liquidation Co. – Cont’d
• Actions – Cross-motions for Summary Judgment
• Plaintiff:
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JPMorgan authorized the filing of TLF UCC-3
JPMorgan = unsecured creditor
• Defendant:
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SLF UCC-3 termination statements authorized and intended
TLF UCC-3 termination = unauthorized and unintended and, therefore,
ineffective
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In Re: Motors Liquidation Co. – Cont’d
• Rulings:
• US Bankruptcy Court SDNY:
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Subjective intent governs
TLF UCC-3 termination statement not effective
• Second Circuit Court of Appeals
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Reversed and remanded
Subject intent irrelevant
JPMorgan approved filing of all three UCC-3s and counsel
had actual authority to file
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Contact
Adam Dempsey
Houston
T: +1.713.221.1525
E: adam.dempsey@bgllp.com
bgllp.com/dempsey
Adam represents and counsels exploration and production companies, pipeline companies, developers,
purchasers, sellers, borrowers and lenders in all aspects of energy and energy-related transactions,
including oil and gas, liquefied natural gas (LNG), and gas and liquis pipeline transactions. These
transactions have included mergers and acquisitions, exploration, production and development
agreements, transportation and processing agreements, joint ventures, farmouts, and participation
agreements. Additionally, Adam represents domestic and foreign lending institutions and borrowers in
connection with a wide variety of commercial lending transactions. This work includes structuring,
negotiating and documenting of all types of senior, subordinated, secured, second lien, and unsecured
syndicated financial and other lending transactions, as well as secured asset-based debt financings,
acquisition and working capital facilities, letter of credit facilities, bond credit enhancement facilities, and
oil and gas secured financings.
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Contact
Stephen Boone
Houston
T: +1.713.221.1521
E: stephen.boone@bgllp.com
bgllp.com/boone
Stephen Boone focuses on energy, oil and gas and financing matters. Mr. Boone represents and
counsels developers, exploration and production companies, private equity funds, purchasers, sellers,
borrowers and lenders in all aspects of upstream and midstream oil and gas transactions, including
acquisitions, dispositions, joint ventures, financings, participation agreements, seismic agreements,
contracts for drilling and other oil field service arrangements, operating agreements and other
agreements related to the ownership and development of oil and gas properties.
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DISCLAIMER
• This PowerPoint presentation is an educational tool that is
general in nature and for purposes of illustration only. The
materials in this presentation are not exhaustive, do not
constitute legal advice and should not be considered a
substitute for consulting with legal counsel. If legal advice
or other expert assistance is required, the services of a
competent professional should be sought.
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