Member Article

Even in a difficult commodity price environment, acquisition transactions can produce lucrative opportunities for buyers of oil and gas interests and creditor relief for sellers. One type of transaction in particular provides an opportunity for distressed sellers not only to avoid bankruptcy, but also eliminate the greatest amount of debt possible that is secured by its oil and gas properties. Rather than face an impending bankruptcy, a seller can enter into a structured distressed sale, conveying its property to a buyer with the agreement of the seller’s creditors that satisfies the debt secured by that property.

When a distressed seller agrees to convey its property and an interested buyer agrees to satisfy the seller’s debt related to that property, the parties draft a Purchase and Sale Agreement (“PSA”), in which the seller agrees to execute an assignment of its property and place it in escrow pending resolution of creditor claims against the property. Prior to finalizing the PSA, the buyer must perform thorough due diligence, identifying and classifying the seller’s creditors who have claims against the property, which helps the buyer determine which debts must be satisfied before acquiring the seller’s property.

By conducting an up-to-the-minute lien search of the property, the buyer can identify the pool of creditors whose agreement is necessary to effect the proposed acquisition. Further analysis determines the perfection and validity of the asserted liens and claims so that the buyer can evaluate the enforceability and amount of claims that encumber the property. A review of the seller’s accounting and land files, including documentation of asserted claims and served notices of liens or suits filed against the seller or specifically against the property, aids in quantifying the total indebtedness and encumbrances. A title search of the real property records indicates the seller’s ownership of the property and confirms the filing of liens, including both those already known and unidentified encumbrances. In most states oilfield mechanics and materialmen may file statutory liens up to 180 days following the date services or materials were last provided to the property. Accordingly, a lien search of the county records will not pick up the mechanics and materialman’s (“M&M”) liens that may be filed against seller’s interest in the property over the next six months. Therefore, a review of recent operations conducted on the property is also important.

Although the PSA is an agreement between the distressed seller and the buyer, it may contain provisions intended to persuade creditors with interests in the property to support the sale. If the PSA contains provisions allowing the buyer to walk away from the transaction at any time before closing, and another stating that the seller is not prohibited from voluntarily filing bankruptcy, the PSA may convince the creditors to cooperate with the sale; a creditor may lose a repayment opportunity if the buyer chooses to walk, and the creditor may recover on its debt more quickly if the seller stays out of bankruptcy.

 

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