Protecting Your Joint Venture Assets as Bankruptcies Rise

By January 19, 2016Insights

On December 31st, Swift Energy became the latest E&P to file bankruptcy, becoming the 41st company to do so since oil prices began declining in 2014. Swift Energy joins several other companies to file for bankruptcy protection in 2015, including New Gulf Resources, Magnum Hunter Resources, Samson Resources Corporation, Sabine Oil and Gas, Milagro Oil & Gas and Quicksilver Resources. Due to the continued decline in oil and gas prices, we anticipate a continued rise in bankruptcy filings in 2016.

UNDERSTANDING LIEN PRIORITY
Joint Venture 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 by JV partners 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 JV partner (e.g. your company), and a counterparty (e.g. operator) to the agreement files for bankruptcy, then the JV partner 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 JV partner 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 day to day impact of assets held in bankruptcy, and work with your legal counsel to write up a plan which affords the greatest financial protection of your assets.

IDENTIFY YOUR RISK
Taking Steps to Protect Your Assets

1.  Review all JOAs, farmouts, pooling agreements and other similar agreements with any third party partners.
2.  Determine which agreements are properly recorded.
3.  Make sure any new leases or renewal leases have been properly assigned from your JV partner.
4.  Ensure that all leases and agreements are being extended or renewed by the contractually obligated JV partner on acreage with undeveloped reserves allocated to those lands.
5.  Determine if you have UCC-1s filed in the appropriate states.
6.  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.
7.  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.
8.  Research your agreement partners’ financial filings and activities over the past 6 months and identify those who are at risk.
9.  Talk to your legal and financial advisors about protecting your assets.

PROTECT YOUR ASSETS
How We Can Help

The longer you wait to perfect your filings, the greater the risk becomes of losing asset value in a bankruptcy filing.
Cinco can help you quickly mitigate this risk and protect the value of your holdings. We are currently assisting several international non-operators and their counsel to ensure their agreements are properly perfected in case of a counterparty bankruptcy filing. We help inventory and identify any third party agreements, determine if they are properly recorded, and if not, record memorandums of those agreements. Cinco is also helping clients identify potential at-risk partners who may be likely to file for bankruptcy this year. We also collaborate with lending institutions to determine if at-risk companies have additional unsecured assets that can be collateralized.

Call us to discuss your concerns, and how we can help address your company’s exposure to counterparty bankruptcies. Should you require expert legal counsel or financial advisors, we can also provide you with access to our global network of industry experts to serve you.

COVERAGE ACROSS NORTH AMERICA
Cinco Energy Management Group has five offices located strategically throughout the United States. This geographic spread ensures that Cinco has the specialized, regional knowledge and talent necessary to work in any North American shale play. We understand the cyclical nature of the energy business and have helped our clients navigate land issues in previous down cycles.

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Helping advocate on behalf of our clients and their advisors.