OVERVIEWE - Cloud Object Storage | Store & Retrieve … · Table. The uptick in E&P court filings and the prospect that plenty more ... Oct. î ò, î ì í ñ [available to Debtwire

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LEGAL ANALYSIS E&P INDUSTRY RESTRUCTURING ISSUES| 19 NOVEMBER 2015

E&P RESTRUCTURINGS TURN ON STATE LAW PROPERTY RIGHTS, COLLATERAL DOCUMENTATION AND LIEN PERFECTION

OVERVIEW

E nergy sector conditions—principally the drop in oil prices—

have led to a wave of restructurings this year for borrowers

engaged in oil and gas exploration and production (E&P). The

unique operations and capitalization of an E&P company present

a plethora of industry-specific restructuring issues for practition-

ers and investors. This Special Report by the Debtwire legal ana-

lyst team provides an introduction to many of these issues by

surveying the landscape of E&P company restructuring concerns.

The entire energy space has been a focus area for Debtwire this

year. The distressed research team has been keeping an eye of

the energy sector’s dissent into Chapter 11 cases in its monthly

Energy and Related Services Watchlist, as well as its weekly

Restructuring Roulette Tables, which highlight the near-term

trigger points for the most at risk E&P and services companies.

CLICK HERE for the November 2015 Watchlist.

CLICK HERE for the E&P Company 17 November Roulette Table.

CLICK HERE for the E&P Service Provider 17 November Roulette

Table.

The uptick in E&P court filings and the prospect that plenty more

are on the way dictate that we focus here on the plight of E&P

companies from a legal perspective. Of the roughly 150 U.S.

bankruptcy cases filed in 2015 that the Debtwire court team is

currently covering, 43 are E&P (and related) companies, as listed

on ANNEX A. Further, numerous E&P companies have engaged

in out-of-court transactions in order to keep themselves from

bankruptcy court, or at least kick that can further down the

road. A chart of 2015’s E&P company exchanges is provided in

ANNEX B.

In this report, the legal analyst team takes a bird’s-eye-view of

E&P-specific restructuring issues, from the unique debt document

provisions previously highlighted by Xtract Research, to the com-

plex intersecting issues of state property law, industry-specific

Bankruptcy Code protections, and finally to some general strate-

gic takeaways. Note that we have specifically omitted a discus-

sion of specific legal issues for companies conducting operations

on the Outer Continental Shelf, which will be the subject of its

own report.

E&P COMPANY DEBT OVERVIEW Before turning to the bankruptcy-specific issues, we begin with

an overview of E&P company capitalization, ground well-tread by

Xtract Research, whose reports we reference below. Generally, to

begin to understand E&P-specific restructuring issues, it’s vital to

understand the basics of reserved-based lending and why oil &

gas collateral might be prime targets for lien attacks.

RESERVE-BASED LOAN FACILITIES. Oil and gas secured bank

debt issuance is unique in that it is typically based on the value

of reserves—the hydrocarbons yet to be extracted—with repay-

ment of the loans tied to the revenue stream from the wells’

production. At a high level, this means that the collateral value

is subject to more extreme fluctuation than your typical asset-

based collateral package, which can cause trouble for an E&P

company during borrowing base redeterminations.[1] Specifi-

cally, E&P companies typically borrow under a reserve-based

loan facility (RBL) as opposed to the more traditional asset

based loan facility (ABL), which is secured primarily by a bor-

rower’s “proved” reserves.

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CONTENTS

E&P COMPANY DEBT OVERVIEW 1 STATE LAW PROPERTY CLASSIFICATIONS 3 STICK-BY-STICK 3

OIL & GAS LESSEE AND LANDOWNER’S ROYALTY 3

WORKING INTERESTS AND FURTHER ROYALTIES 3

CATEGORIZING THE STICKS 4

CONTRACTUAL RELATIONSHIPS 5 ESTATE PROPERTY AND CONTRACT RIGHTS 6 IMPERFECT PERFECTION 7

COLLATERALIZATION BASICS 7

STATUTORY LIENS 8

TAKEAWAYS 9 SUGGESTED FURTHER READING 9 ENDNOTES 9

ABOUT THE AUTHOR AND CONTACT INFORMATION

Jack M. Tracy II

Senior Legal Analyst, North America Tel: 646.378.3177 | [email protected]

Jack is a former practicing restructuring attorney. Prior to joining Debtwire as Senior Legal Analyst, Jack practiced in the New York offices of Akin Gump Strauss Hauer & Feld LLP and Willkie Farr & Gallagher LLP.

He has represented debtors, official committees and ad hoc groups in several high-profile restructurings, including James River Coal, Energy Future Holdings, Edison Mission Energy, Nortel Networks, Cengage Learning, Otelco and Broadview Networks.

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LEGAL ANALYSIS E&P INDUSTRY RESTRUCTURING ISSUES| 19 NOVEMBER 2015

E&P COMPANY DEBT OVERVIEW (CONTINUED) And thus we have our first term of art—“proved” reserves. Reserves are initially split into two categories, “proved” and “unproved.” “Proved” reserves are the more valuable of the two, as those reserves have at least some certainty of recoverability. “Unproved” reserves are generally too speculative to form the basis for RBL lending.

As illustrated on TABLE 1, proved reserves are then split into three more categories, listed in decreasing value due to the amount of additional work needed to be completed on the site: (1) proved de-veloped producing (PDP); (2) proved developed non-producing (PDNP); and (3) proved undeveloped (PUD). As for unproved reserves,

they are split into those that are “probable” and those that are “possible,” reflecting at least a 50% or 20% chance the extraction will hit estimates, respectively. The primary sources of reserve valuation information are quarterly reserve reports produced by engineers and geologists.[2]

Reserve values are not just important in RBL lending and borrowing base determinations, but also in determining the value of a compa-ny’s interest in oil & gas leases (described in detail below), specifical-ly in the DCF analysis. However, note that valuation experts needing to dive-in on a well-by-well basis would require further information and could not live and die by these reports.

TABLE 2: XTRACT RESEARCH REPORTS

Special Report Date

Oil and Gas Bonds: Some Noteworthy Provisions, Oct. 27, 2014 Oct. 27, 2014

Energy Sector Debt Capacity Cheat Sheet, Feb. 24, 2015 Feb. 24, 2015

Energy Sector Debt Capacity Cheat Sheet Part II, Apr. 6, 2015 Apr. 6, 2015

Debt Reclassification and the Issue Date Exception in Oil and Gas Bonds:

Houston We Have a Drafting Problem

Oct. 26, 2015 [available to Debtwire subscribers HERE]

COLLATERAL. As more fully explored below, the nature of an E&P company’s assets can lead to significant collateralization issues. In a bankruptcy proceeding, unsecured creditor committees are common-ly focused on not only discovering what assets have been carved out of the collateral package, but also what assets have not been properly secured under applicable law. While in typical restructurings an un-secured creditors’ committee may find an unperfected lien or two, or a missed deposit account control agreement on a bank account, E&P companies seem to give committees a lot of room for lien attacks.

As explained in Quicksilver Resources court papers,[3] oil and gas industry financings typically (1) do not include blanket liens on all of a company’s assets; (2) do not require borrowers to mortgage all pledged collateral; and (3) often do not secure cash or cash borrow-ings.[4] Rather, the collateral documents—which are admittedly hard to come by—will instead provide liens on the oil and gas leases them-selves, real estate and equipment, and proceeds from production. As these assets range from real property to personal property, different collateralization procedures apply, requiring a panoply of securitiza-tion documents, each with their own required contents and filing lo-

cations. The more complicated the process, the more opportunity for mistakes and avoidance risk.

Also, because of the nature of the assets and typical operation of an E&P company, the exact collateral package is constantly in flux. E&P companies freely transfer and assign new leases, acquire interests in new depths on a plot, etc. Thus, frequent collateral reporting and vigi-lant back-end administration are vital to properly perfect liens on the collateral (details discussed further below). In the Debtwire legal ana-lyst team’s experience, a lender tends to have enough trouble keeping abreast of a debtor’s new bank accounts, let alone a consistently fluctu-ating collateral package requiring frequent securitization maintenance.

DEBT DOCUMENT ISSUES. Finally, our friends at Xtract Research have issued a number of reports on the ins-and-outs of E&P company financing documents, highlighting loopholes and drafting issues that become particularly relevant in a company’s out-of-court liability management strategies. Xtract Research subscribers can access the reports listed on TABLE 2 at www.xtractresearch.com.

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TABLE 1: RESERVE VALUATION CATEGORIES

Proved Developed Producing (PDP) Reasonable certainty of commercially recoverable hydrocarbons. Estimated >90% chance of production.

Proved Developed Non-Producing (PDNP) Additional work needed before reserves can be produced.

Proved Developed (PUD) Expectation of production from new wells on undrilled land or existing wells requiring major expenditures.

Unproved—Probable >50% chance of being technically and economically producible.

Unproved—Possible >20% chance of being technically and economically producible.

Source: Williamson, Deborah D. and Bishop, Meghan E., When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy (American Bankruptcy Institute, Alexandria, VA 2012) .

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STATE LAW PROPERTY CLASSIFICATIONS As restructuring attorneys might remember from law school, proper-ty rights are commonly described as a “bundle of sticks”—meaning that property comes with numerous rights than can be spliced and transferred separately. However, before we get to how E&P compa-nies split the baby, we start with another common property law prin-ciple—“you can’t convey more than you own.”

An E&P company rarely owns the land and subsurface minerals for the tracts it is working on. Rather, the company has received a par-ticular “stick” from the actual owner of what is referred to as the “mineral estate.” That stick handed to the E&P company is the right to come onto the land, explore, develop, extract and produce and is typically called an “oil & gas lease”.[5]

The “lease” part of that term, however, is often more industry jargon than legal qualification. In property law speak, a real property lease grants a “leasehold interest”—a temporary permission—and notably true unexpired “leases” on nonresidential real property are governed by specific Bankruptcy Code provisions. Thus, depending on state law, what one would normally call an oil & gas lease may not be a “true lease” in the legal sense at all—and it often isn’t.

Thus, it becomes clear just how important the state law classification of the oil & gas lease “stick” granted to the E&P company is in the restructuring process, which we further explore below. And that’s

why the property adage above regarding what a property owner can convey/transfer is important. The owner of the underlying mineral estate can only convey to an E&P company as much as he/she owns, meaning that oil & gas lease property classification starts with classi-fying the underlying mineral estate. Once that question is answered, we can start to clarify what the E&P company’s “stick” will be deemed and then how it will be treated.

The Bankruptcy Code leaves defining property rights to state law, and thus depending on the footprint of the particular E&P company, a company’s collective oil & gas leases might be treated differently despite their similarities (some choice of law concerns highlighted in the SemCrude bankruptcy are noted later in this report).

State mineral rights laws are extremely complicated and special-ized—especially in oil and gas states—and thus parties active in an E&P company’s restructuring will require uniquely experienced advi-sors. But from a bird’s-eye view, the primary question is whether the applicable state treats the mineral estate as an interest in real prop-erty, and then whether that interest is a “fee estate” or more akin to a license or permit. While a “fee estate” is owned absolutely with all rights to use, possess and dispose of the estate (you own all the “sticks”), real property interests like leases, licenses and permits may lack certain “sticks,” like the right of possession.

State law takes two general approaches as reflected on TABLE 3.

As discussed further below, the reason this issue is critical for an E&P company’s in-court restructuring is that, again, a mineral estate hold-er cannot convey a greater interest than he/she owns. Thus, in “ownership in place” states, the mineral estate holder holds all the “sticks” and can convey them to an E&P company in any way they see fit, while in non-ownership states, the mineral estate holder can only convey rights to its license to explore.

How the transfer to the E&P company is categorized—a real property con-veyance of a new “fee estate,” a lease of real property, a further license to explore, and/or a contract right—is the next question. This will determine whether the particular oil & gas lease or related interest is property of the estate or a right governed by an executory contract or unexpired lease, each of which implicate different strategies in bankruptcy.

STICK-BY-STICK After identifying the state law categorization of the underlying rights in the mineral estate as either a “fee estate” of absolute ownership or a mere permit or license to explore, it’s time to classify what that mineral estate owner has (1) conveyed to the E&P company, and (2) carved out and retained for itself.

OIL & GAS LESSEE AND LANDOWNER’S ROYALTY. Because hold-ers of mineral estates rarely have the capital or resources to extract the oil & gas themselves, they typically grant exploration and produc-tion rights—one of their “sticks”—to the aptly named E&P compa-nies. Such companies will also be granted a slice of the production proceeds, while the mineral estate holder will carve out and retain a portion of its original right to the proceeds—known as a royalty inter-est. We’ll talk more about different flavors of royalty interests, but this one is notable in that it is a “stick” retained by the mineral estate holder, not conveyed back from the E&P company as an “exchange.” In other words, the mineral estate holder never gave that “stick” of rights to an amount of proceeds away. Thus, the E&P company must hand over the sum of that retained right, paid as royalties by the oil & gas lessee back to the mineral estate owner without netting the costs of production. The oil & gas lessee’s proceeds thus bear the full bur-den of its production expenses.

WORKING INTERESTS AND FURTHER ROYALTIES. Further, note that we are assuming that the initial recipient of the oil & gas lease is

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TABLE 3: STATE LAW VIEWS ON MINERAL ESTATES

“Ownership in Place”

Under this theory, the mineral estate holder has a “fee estate,” an outright ownership and all rights thereto, and can freely create leasehold interests to convey to other parties. This is the majority rule and is, for example, followed in Texas, Colorado, Pennsylvania, New Mexico and Kansas.

“Non-Ownership”

Under the minority theory, the mineral estate holder has the “real” right to explore and produce the oil and gas, like a license or permit, but does not have possession of the minerals in the ground. Oklahoma, California, Louisiana and Wyoming follow this rule.

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STICK-BY-STICK (CONTINUED) the same E&P company working on the land, which isn’t always the case. The oil & gas lessee might just be the middle man, conveying the “working interest” portion of his/her oil & gas lease to the E&P company, retaining a portion of his/her own royalty right in the process.[6] To make things even more complicated, the working interest itself (whoever held by) can also be spliced and assigned to others, meaning that the original mineral estate holder, the initial lessee, or any subsequent working interest holder could have split the working interest they have into separate pieces to cover different parcels of the overall land, be it by surface area or varying subsurface depths. The assignee re-ceiving a slice of a working interest will also take a slice of the assignor’s right to the proceeds—yet another royalty interest.

One quick note on these subsequent royalty cuts. As opposed to the original mineral estate holder’s retained royalty upon the grant of the original oil & gas lease, these further royalties are retained when subsequent working interest holders further assign portions of their inter-ests and the right to proceeds they previously received. A working interest holder might also assign a portion of its right to proceeds to ser-vice providers or in a financing arrangement, and can choose whether or not expenses get factored into the payout. As such, royalty pay-ments come in several different flavors. We briefly describe a few common royalty interests, and certain fees, in TABLE 4.

Farmout Agreements. Finally, one more term of art that has its own implications—farmouts/farm-ins. Instead of assigning a working inter-est to a third-party, an oil & gas lessee might decide that while he/she has no interest in a particular portion of the land, he/she doesn’t want to give it all away just yet. So, the lessee finds an operator who might want that land and enters into a farmout agreement which works like a conditional assignment. The operator gets to work on the land and will benefit from an assignment of that land from the lessee upon per-forming a certain amount of development. Thus, it is an earned assignment. The Bankruptcy Code has a special protection for property sub-ject to farmout agreements being brought back into the estate, as discussed further below.

In the end, a single E&P company might be an oil & gas lessee, a working interest holder, a working interest transferee, a party to a farmout agreement, a royalty recipient and/or a royalty payor—and possibly all of the above with respect to multiple underlying mineral estates. Al-so, it is important to note that each of these interests typically have a specified term and resulting reversion, or include specific termination events like failure to produce or failure to timely make a royalty payment, which also become important in bankruptcy. Categorizing that company’s varying interests under state law is the critical issue to determine their treatment in a Chapter 11, which again all starts with the classification of the original mineral estate. We start that categorization below.

CATEGORIZING THE STICKS. When doling out the E&P “stick”, or working interest, either by the initial mineral estate holder or by a subse-quent working interest holder, a key question is if that party conveyed real property as a further “fee estate” of absolute ownership for a specified term. Or have they leased the real property for a specified purpose over a specified term? Or are these just contractual rights?

Majority view. The majority “ownership in place” jurisdictions (refer back to TABLE 3, page 3)—which say that the mineral estate holder has a “fee estate” of absolute ownership in real property—will typically also treat the doled out working interests as real property conveyanc-es as well, which are subject to termination upon a particular event. However, in all cases, the specific terms of the “lease” documents will govern the ultimate categorization. In property law speak, this is a “fee simple determinable”—meaning an absolute ownership right that just happens to have an automatic end date and results in a reversion to the original grantor.

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TABLE 4: ROYALTY INTERESTS/OTHER FEES

Overriding Royalties (ORRI)

Royalties carved out of the working interest based on a share of the production and free from expenses of production. The interest might be for a specific term or be tied to the term of the underlying working interest.[7]

Production Payments/Oil Payments

A specified sum of the proceeds of the oil & gas, or a volume of the production without factoring in costs of production. These payments are commonly used to repay project financing loans ac-quired by the working interest holder—i.e., the stream of payments pays off the loan—and typi-cally share the same expiration as the underlying working lease. Production payments are some-times referred to as “term ORRIs.”

Net Profits Interests (NPI) A share of the profits of production—netting out the operating expenses first, carved out of the working interest, typically considered to be personal property as opposed to real property.

Shut-in Royalty A fee paid to keep the “lease” on a non-producing parcel effective.

Delay Rentals Payment by “lessee” to mineral rights holder if commercial production does not begin as ex-pected (i.e., late-fees).

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STICK-BY-STICK (CONTINUED) It’s important not confuse this “real property fee simple determinable” classification as making the oil & gas “lease” a “true lease.” A “true lease” governs the grant of a “leasehold” interest—less than a “fee” interest—which is just a temporary right to occupy land or property. The “fee” interest, on the other hand, is not a temporary right, it’s an absolute right that just happens to end later. This is an important dis-tinction as the oil & gas “lease” in this circumstance is not typically an “unexpired lease” governed by Bankruptcy Code section 365 since no true leasehold interest was created. Under the right circumstances, the governing document could, however, be an executory contract un-der section 365, as discussed further below. Isn’t property law fun?

Minority view. “Non-ownership” states (again refer back to TABLE 3, page 3)—that deem the mineral estate holder to have something more akin to a license or permit—are tricky, and inconsistent at best.

Oklahoma, for instance, will treat the working interest as a real property interest some of the time, depending on the circumstances. Louisi-ana has called the “lease” a contract, but there is also contrary case law. If these states call the working interest a real property right, there’s a chance it could even be a true leasehold interest. There’s also a chance that the conveying document is an executory contract. Unfortu-nately the minority view states are too varied to provide a clear takeaway and will require state-by-state research.

Finally, let’s not forget the retained or conveyed royalty interests. As most states call the underlying mineral estate a real property interest, so typically is the royalty right carved therefrom, although there are of course variations among the states.[8] Louisiana law on the subject is scattered and contradictory. More important to the bankrupt E&P company, however, is whether the royalties it is obligated to pay out can be cancelled/rejected under section 365 and the priority of unpaid prepetition royalties.

While unpaid prepetition royalties are at best general unsecured claims, they may rise to “critical vendor” status and require payment early in a case so that the debtor can stay in good standing with the lessor (or, sometimes, avoid termination of the lease). As a result, paying roy-alties in the ordinary course often becomes a request for first day relief.[9] Notably, debtors often take the position that the royalties aren’t claims at all, because they are real property that belong to someone else—i.e., not actually property of their estate, as discussed further be-low. After the state property law survey above, we think this is the right answer. Moreover, prompt payment of royalties will also avert the creation of statutory liens, as also discussed further below.

CONTRACTUAL RELATIONSHIPS One last thing before diving into the Bankruptcy Code. As described above, working interests over a single mineral estate are often split among multiple E&P companies. Further, E&P companies themselves don’t necessarily have the equipment or personnel to perform the production work, requiring contracting and subcontracting. Contracts—which may or may not be executory and subject to Bankruptcy Code section 365—tend to govern these relationships, with the most common described in TABLE 5.

CUSTOM TERMS. PARA.

[PARA]

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TABLE 5: E&P CONTRACTS

Joint Operating Agreement (JOA)

The agreement that governs the operations of a lease that has split working interests among multiple E&P companies. One of those working interest holders will become the “operator” tasked with the administrative duties of production, sale, revenue collection, royalty payments, contracting with workers and billing the remaining working interest holders (“non-operators”) for their share of the production expenses (“joint interest billings”). Failure to pay or collect joint interest billings might come with consequences—from penalties to replacement as operator to termination—and thus debtors may request court authority to perform under these agreements in the ordinary course until the debtor has selected the contracts to keep or dump.

Joint Exploration/Development Agreement An agreements between E&P companies to develop or explore an area in the future.

Equipment Leases

The “operator” under a JOA may not actually own drilling rigs, and thus might lease them. As with any equipment financing, there’s always a recharacterization risk in deeming these “leases” disguised “secured financings.”

Drilling Contracts

Or the “operator” might contract with drilling contractors to use their equipment and do the work themselves. Those contractors might subcontract exploration and production work to further third-parties. The relationship of the service provider to the ultimate operator will determine how statutory mineral liens are created, as discussed below.

Service Contracts/Master Service Agreements

In addition, producing oil & gas might require numerous other services, which could be governed by a controlling master service agreement. Here the question becomes whether the master agreement is a single agreement that can be accepted or rejected, or whether the agreement should be split into separate distinct contracts.

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CONTRACTUAL RELATIONSHIPS (CONTINUED)

CUSTOM TERMS. Oil & gas leases, JOAs, joint ventures and other agreements may all have “custom terms” that the debtor should be mindful of, specifically with regard to what acts might trigger termi-nation. Payment of royalties and continued drilling may be requisites to maintaining important assets. While post petition performance can possibly be labeled ordinary course of business transactions that do not require court approval, any satisfaction of prepetition claims prior to confirmation will require authorization. This can be a real concern with respect to royalty payments which are typically delayed one month following sales, for oil, and three months following the production month, for gas.

Another “custom term” that might cause problems in a restructuring is when a lessee is required to “produce” in order to keep its interest. Moreover, there is a typical habendum clause in oil & gas leases that requires production to be “in paying quantities” for the lease to re-main in force past its initial term.[10] Whether the applicable well is in fact producing in paying quantities will be yet another matter of state law.

ESTATE PROPERTY OR CONTRACT RIGHTS Now that we have a handle on the basics of all of the interests that might be spread around, it’s time to take a look at the Bankruptcy Code. As noted above, the Bankruptcy Code leaves the determination of property rights to state law, and these interests could be classified as anything from real property to personal property to contract rights. So, once you know what state law calls the rights you’re inves-tigating, it’s time to see what the Bankruptcy Code does with them.

ESTATE PROPERTY. Estate property is defined by Bankruptcy Code section 541—a broad section meant to cast a wide net to include “all legal or equitable interests of the debtor in property.” Further, sec-tion 541(d) specifically carves out of the estate any property in which the debtor holds “only legal title and not an equitable interest, such as a mortgage secured by real property,” clarifying that such property only “becomes property of the estate . . . to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”

Applying this concept very generally to the working and royalty inter-ests that are usually considered real property interests, if a debtor holds such an interest, it will likely be deemed property of the estate. On the flipside, any working or royalty interest the debtor granted to another party is likely not property of the estate because the debtor does not hold the equitable interest under section 541(d). But if only it were that simple.

Section 541/544 Conflict. Recall that working and royalty interests are commonly considered to be real property interests under state law. Thus comes application of state real property law governing, among other things, recordation of interests. Each state has its own recording procedures for parties who claim that they have an interest in real property, each with the overall purpose of making sure subse-quent purchasers are aware of any interests of the property. If an interest in real property is not recorded, a subsequent bona fide pur-chaser might be able to avoid the interest altogether under state law.

Bankruptcy Code section 544(a) gives the debtor-in-possession cer-tain statuses as of the petition date—a judicial lienholder, a bona fide purchaser of real property, etc.—so that it can avoid obligations void-able under applicable law. So the Code’s legal fiction is that on the petition date, the debtor-in-possession is a real property purchaser of its property, and can look to state law to find avoid any prepetition unrecorded real property interests. Thus, unrecorded working or

royalty interests in most states would theoretically be put in the avoidance cross-hairs, clawing those grants back into the estate.

This puts sections 541 and 544 in stark conflict. On one hand, the granted yet unrecorded interest is not property of the estate, and on the other hand that grant might be avoided for being unrecorded and thus pulled back into the estate. So which provision wins? It depends on the circuit, as there is a split of authority.[11]

Note however that we are speaking of state law avoidance of unre-corded interests very generally, and lack of recordation is not always the final word on the issue. Thus, applicable state assignment law should be consulted. Further, while we note that unrecorded royalty real property interests might also get caught up in this situation, they might benefit from special statutory mineral liens that might not re-quire recordation at all, discussed further below, making this issue primarily one for unrecorded working interest assignments.

Farmouts. A subset of commonly unrecorded real property rights find special protection in the Bankruptcy Code from the section 541/544 conflict. Section 541(b)(4) gives special attention to rights granted under farmout agreements.

As described above, under those agreements, assignees earn their rights to the land over time through their work, and so section 541(b)(4) protects those farmees who haven’t yet recorded their earned assign-ment by carving such earned property out of the debtor’s estate. First, the section specifically blocks the debtor’s ability to reject the agreement through section 365. Second, the section also blocks the debtor’s attempt to avoid the assigned interest for failure to record through its section 544 powers.

When the debtor is the farmor, the section’s application as an estate property carve out is clear, although there is uncertainty over to what extent interests not yet properly earned under the agreement might still be subject to section 365 rejection. When the debtor is the farmee, the section applies most when such debtor has further as-signed its interests under the farmout agreement to third-parties.[12]

Royalty Interests. As noted above, while royalty interests might fall into the section 541/544 conflict, they are common beneficiaries of special mineral liens that would not require recordation, thus side-

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ESTATE PROPERTY OR CONTRACT RIGHTS (CONTINUED) stepping the section 544 problem. When it comes to royalties, a debtor will typically be guided by the consequences of nonpay-ment—termination of the underlying lease or the application of stat-utory liens. Thus, debtors seeking to pay royalties in the ordinary course will often take the affirmative position that such funds are not property of the estate to begin with.

Further, a certain subset of royalty interests benefit from an estate property carve out much like farmouts. Section 541(b)(4)(B) provides a protection by specifically carving out of the debtor’s estate any oil and gas interests transferred under a written production payment conveyance to a non-operator.[13]

Recall that production payments (which could arguably also include ORRIs under the Bankruptcy Code definition) are just one flavor of royalty amongst many. Further, the carve out specifically only ap-plies to payments to non-operators. Thus, production payments granted as consideration by an operator to service providers may not be protected.

CONTRACT RIGHTS. Now, regardless of the estate property ques-tion, a debtor may have granted working interests or royalties[14] pursuant to a contract or lease that it would like to assume or reject under Bankruptcy Code section 365. However, for the provisions of section 365 to apply—including assumption/rejection deadlines, ade-quate assurance and cure payments, etc.—the document in question must either be an unexpired lease or an “executory” contract.

Leases. As noted above, in the majority of states, the mineral es-tate and the rights conveyed therefrom are typically considered to be real property held as a “fee” estate rather than a “leasehold” estate. Thus, generally oil & gas leases are not “true” leases in a legal sense.[15] Minority jurisdictions may not find “true” leases either, especial-ly if the jurisdiction views the oil & gas lease as a “license” to explore and develop.[16] The actual contents of the documents will control.

Executory-ness. The Bankruptcy Code does not define “executory contract.” Under the common Countryman definition, generally, a contract is only executory if material obligations exist on both sides of the contract other than the payment of money. When it comes to oil & gas leases, in the majority of states viewing the grant as a real property interest, it will be difficult to satisfy this definition since ma-terial obligations likely no longer exist post-conveyance unless there are continuing unearned rights or obligations.[17] Again, the terms of the specific contract will guide the analysis.

On the other hand, note that JOAs and other joint exploration/development agreements are commonly treated as executory con-tracts.[18] However, master agreements or contracts that break obli-gations into multiple “phases” are subject to the argument that the agreement must be split into separate contracts, arguably taking some of the obligations out of the scope of section 365 and negating the ability of a debtor to accept or reject them.

IMPERFECT PERFECTION Beyond contention of whether a debtor’s working interests or royal-ties are property of the estate, the issue of which creditors might have dibs on those interests pursuant to secured financing arrangements or competing mineral liens also comes into play. But before getting into that conflict, let’s highlight some general collateralization concepts.

COLLATERALIZATION BASICS. In the legal analyst team’s experi-ence, secured noteholders and syndicated lenders tend not to think about the securitization process for their underlying collateral until restructuring negotiations have begun or the UCC has begun its lien attack.[19] This is an even bigger problem in the E&P space because of the additional complexities brought by collateral interests deemed “real property” under state law, the industry-specific documentation and collateral packages described above, and the nature of the shift-ing asset base (earning interests over time).

Very generally, granting a security interest has two basic steps, attachment and perfection. Executing the agreement that pledges the collateral is usually the attachment, while the perfection step is designed to “put the world on notice” of the granted interest.

Perfection. Perfecting a security interest typically requires a filing with the appropriate jurisdiction’s records database, thereby putting the public on notice of the interest. Conceptually, this is similar to the required recordation of real property interest described above. Also similar to the discussion above, Bankruptcy Code section 544 grants a special status to the debtor-in-possession as of the petition date—this time as a judicial lien creditor—which then gives the debt-or the ability to look to state law to avoid unperfected competing liens.[20]

The issue for secured creditors of E&P companies is that perfection is not always as simple as filing your UCC-1 financing statements with the secretary of the state, as those are part of the perfection of liens on “personal” property, not real property. There are separate re-quirements for perfecting real property, commonly including filing a mortgage deed of trust in the land records of the appropriate munici-pality. The uniqueness of an E&P company’s real property assets is what can cause trouble.

Since the majority view is that oil & gas leases and royalties are inter-ests in real property, properly securing them requires a different ad-ministrative process. Not only will the required filing locations be a bit broader (possibly in specific counties), but each state will also have its own requirements for how to appropriately describe the collateral. We’ve had a hard enough time describing the different types of interests in this report, so you can imagine how a loosely drafted a collateral description might leave open opportunities for a lien attack.

In addition, as E&P companies’ real property interests are constantly changing, this only compounds the administrative complexity of per-fection. Unsecured creditors committees already have their eyes peeled for perfection issues in Chapter 11s, in order to threaten or accomplish lien avoidance. The E&P industry seems to give them quite the playground.

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LEGAL ANALYSIS E&P INDUSTRY RESTRUCTURING ISSUES| 19 NOVEMBER 2015

IMPERFECT PERFECTION (CONTINUED) Case Study. Take Quicksilver Resources as an example of how collateralization issues can complicate an E&P company’s restructuring. The company filed its domestic operations for a free-fall Chapter 11 in March 2015, paired with an agreed-to forbearance with secured credi-tors on foreign debt cross-defaults. The company’s first day declaration described a number of unencumbered asset buckets, from unper-fected liens to unencumbered property. The official committee challenged the adequate protection packages under the proposed cash collateral, eventually reaching a settlement.

Then the case went quiet, with the company revealing in a subsequent exclusivity extension request that it was engaged in a multi-front plan negotiation process. Notably central to that negotiation were competing views on the value of unencumbered assets, which required a well-by-well analysis since each well was only partially encumbered (recall our discussion above on how well-by-well valuation would require a deeper dive than the industry’s quarterly reserve reports). The parties diverged on their methodologies, and the company soon saw fit to begin a sale process due to the inability to construct a consensual reorganization plan. The auction is set for next month.

In the meantime the official committee discovered numerous potential issues with second lien collateral, and recently filed a complaint attacking those liens. The committee had also noted in numerous court papers that it intended to fight any second lien credit bid for the company’s assets.

First in Time. But if secured collateral is properly perfected and immune from avoidance, it’s also important to remember the general rule of “first in time.” Generally, the first creditor to perfect an asset is the first party in line. When certain “relation back” statutes apply—pushing back the date of perfection to an earlier time—there’s a potential priming threat to secured financing liens perfected in the interim window, discussed further below.

STATUTORY LIENS. The priming threat comes from the existence of special statutory liens under the mineral rights laws of the oil and gas states, which we describe generally below. The threat of these liens—which can arise by operation of law in favor of service contractors, royalty holders or downstream oil & gas purchasers—is twofold. First, when paired with automatic perfection (no filing required) and rela-tion back, secured financing packages might be ultimately primed. Second, even without a priming effect, these liens can bring multiple par-ties to the negotiating table, asking for adequate protection upon a proposed priming DIP, requesting a lift of the stay to foreclose on collat-eral, or any number of other issues that will elevate these creditors from the general unsecured creditor pool. While each state’s governing statutes differ, we discuss two categories generally below.

Service Providers. State statutes might provide a lien in favor of those working on the project’s property. While these liens require an act of perfection typically within a certain timeframe,[21] if perfected, “relation back” statutes could deem the lien arising on the date the ser-vice provider first began working on the project site.[22] Relatedly, mineral lien claimants have also alleged a bootstrapping argument—if they can find one claimant whose lien that is deemed perfected before the liens of the debt stack (due to relation back), they assert that it is an anchor to elevate all of mineral liens as the state statutes often mandate that all mineral lien claimants share pari passu. Thus, all of these claims could end up leapfrogging the debt stack if the contractor makes the requisite filing to perfect the lien.[23]

These liens typically extend to all of the land on which the claimant performed its services (and the wells and pipelines thereon) as well as any material, machinery or supplies furnished by the claimant.[24] There is currently a debate as to whether proceeds of production are also covered by the lien under Texas law.[25] If so, such lien could conflict with the statutory liens on proceeds that might be created for royalty claimants (as described below). There’s further discrepancy as to whether the joint interest billings—the share of expenses owed to the op-erator from non-operators—are also covered by statutory oil & gas service provider liens.[26]

Royalty Interest Holders. Certain oil and gas states have special non-Uniform Commercial Code conforming statutes that create automati-cally perfected security interests to secure unpaid royalties, securing the E&P company’s extracted oil and gas and proceeds thereof. As not-ed above, depending on the reach of the applicable statutes, these liens could conflict with service provider statutory liens and possibly with those pursuant to secured financing.

Choice of Law. A set of three 2009 summary judgment opinions in the bankruptcy proceedings of SemCrude—a downstream purchaser and reseller of energy products—illustrate the intervention of choice of law concerns with respect to statutory mineral liens.[27] While the opinions explored the contours of special atypical statutory liens granted in favor of unpaid E&P companies against their downstream pur-chasers, the Delaware Bankruptcy Court’s choice of law analysis required applying the law not of the location of the oil & gas, but the law of the applicable debtor-entities’ states of incorporation. Notably, this choice of law provision is a Uniform Commercial Code provision and like-ly incorporated into all state law, if not the vast majority. Therefore, SemCrude illustrates how choice of law concerns might ultimately avoid mineral lien issues in the first place.

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LEGAL ANALYSIS E&P INDUSTRY RESTRUCTURING ISSUES| 19 NOVEMBER 2015

TAKEAWAYS The legal implications of the oil & gas industry’s operations are as numerous as they are complex, often with conflicting case law re-sults. The jargon of bankruptcy law, property law and industry termi-nology alone—which we’ve attempted to minimize in this report as much as possible—are enough to make heads spin. This report is by no means a deep dive into the issues, but hopefully serves as a thor-ough launching pad for additional research.

However, this tour through the major issues and our observations of recent E&P Chapter 11 filers tees up a few overall strategy concerns:

DIP FINANCING AND CASH COLLATERAL. Due to the patchiness of collateral packages, a good strategy for secured creditors seeking to control the reorganized company either through the reorganiza-tion plan waterfall or maybe more importantly through a credit bid may want to consider a DIP secured by substantially all assets—thereby filling the collateral holes. Note, however, that while lower tier secured creditors might be silenced from fighting the resulting priming through a governing intercreditor agreement, the existence of automatically perfected mineral liens may give rise to a new tranche of secured creditors that might challenge priming and re-quest adequate protection packages. Ensuring that the debtor is regularly paying royalties and downstream purchasers would be a good way to nip that issue in the bud, allowing the financing propo-nents to focus their fight on the inevitable objection from unsecured creditors committee to the collateral grab.

UNSECURED CREDITOR LEVERAGE. As we’ve seen with Quicksil-ver Resources and have noted throughout this report, holes in the granted collateral package and complicated perfection processes give UCCs both a complicated lien investigation and a nice chunk of leverage. Due to the reasons described above, it’s likely impractica-ble for an E&P company to timely keep up with perfecting all of its potential secured collateral. The bigger the unencumbered bucket, the more power a UCC will have.

STATUTORY LEAPFROGGING. While low, there is at least some threat that the combination of automatic perfection and relation back provisions of state mineral lien statutes could result in such liens priming secured financing. While it is less likely that these liens will prime the entire facility, a statutory lien might sneak into a first lien position on specific assets due to the complexities of the perfec-tion process if the secured creditors dropped the ball here and there over time.

MARSHALLING. Even without a priming effect, if mineral liens attach and are ultimately perfected against some of the secured fi-nancing’s collateral, the mineral lien claimants may seek the equita-ble relief of “marshalling,” requiring a senior creditor secured by nu-merous assets to collect first from collateral that does not have com-peting liens. Under marshalling, the junior secured creditors hope that the senior creditor’s claim will be fully satisfied by other assets, leaving its own collateral to secure its claim alone.

CHOICE OF LAW. As shown in SemCrude, just because the compa-ny’s footprint spans states that have special mineral rights liens doesn’t mean that they’ll ultimately apply. Creditors should be savvy to choice of law issues, which might result in the application of the

laws of a state that lacks the troublesome non-conforming Uniform Commercial Code provisions on mineral liens.

ANTI-ASSIGNMENT LAW. Finally, applicable anti-assignment law could thwart not only the assignment of executory contracts without counter-party consent, but in some jurisdictions their very assump-tion by the debtor. While it’s unlikely that applicable anti-assignment laws exist with respect to oil & gas leases and royalties due to their common transferability in the industry, certain other non-industry specific agreements—like joint ventures, partnerships or certain licenses—may fall into the scope of Bankruptcy Code sec-tion 365(e)(2)(A). If so, the jurisdictional split on this section regard-ing application of the “actual” and “hypothetical” tests should be considered.

Stay tuned for a follow-up article addressing oil & gas leases related to the Outer Continental Shelf.

CLICK HERE for the Debtwire legal analyst team’s primer on coal company specific restructuring concerns.

CLICK HERE for the Debtwire legal analyst team’s primer on interna-tional shipping company specific restructuring concerns.

SUGGESTED FURTHER READING Drilling Down: A Deeper Look Into the Distressed Oil & Gas Industry (Weil Bankruptcy Blog, 2014) (available here - Part One; Part Two; Part Three; and Part Four)

Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Manual of Oil and Gas Terms (15th Ed. 2012) (available for purchase HERE).

Eric M. Van Horn, An Overview of Oil & Gas Bankruptcy Issues (McCathern, PLLC 2015) (available HERE)

Williamson, Deborah D. and Bishop, Meghan E., When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy (American Bankruptcy Institute, Alexandria, VA 2012) (available for purchase HERE)

ENDNOTES

[1] Note that treatises suggest that RBL borrowing base determina-tion provisions are typically generous in terms of lender discretion

[2] The standards for categorizing “proved,” “unproved,” “developing,” and “producing” come from definitions promulgated by the Society of Petroleum Engineers.

[3] See In re Quicksilver Resources Inc., No. 15-10858 (Bankr. D.Del. Oct. 23, 2015) [Dkt. No. 734]

[4] Applicable treatises note that oil & gas companies typically have very little cash on hand anyway.

[5] Also, keep in mind that the owner of the subsurface mineral rights may not be the owner of the surface land, so when determin-ing the web of property interests, parties should also keep track of who owns the surface property and whether the right to enter and commence digging was granted by another party.

[6] Note that one of the “sticks” of the mineral estate holder is an “executive right”—the right to grant leases in the first place—which may be conveyed to others or retained.

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LEGAL ANALYSIS E&P INDUSTRY RESTRUCTURING ISSUES| 19 NOVEMBER 2015

ENDNOTES (CONTINUED)

[7] Note that a recent Texas bankruptcy court decision illustrates how ORRIs might be subject to recharacterization arguments as disguised fi-nancings. See NGP Capital Resources Co. v. ATP Oil & Gas Corp., No. 12-3443 (Bankr. S.D. Tex. Jan. 6, 2014) [Dkt. No. 145] (on summary judgment, rejecting debtor’s attack that certain ORRIs were disguised financings).

[8] See, e.g., Humble Oil and Ref. Co. v. West, 508 S.W.2d 812 (Tex. 1974) (Texas); Colo. Rev. Stat. 38-30-107.5 (Colorado). Oklahoma, however, only considers unaccrued royalties as real property, with accrued royalties becoming personal property, which notably triggers different securitization procedures. McCully v. McCully, 184 Okl. 264 (Okla. 1939).

[9] See, e.g., In re Sabine Oil & Gas Corp., No. 15-11835 (Bankr. S.D.N.Y. July 15, 2015) [Dkt. No. 11]; In re Dune Energy, Inc., No. 15-10336 (Bankr. W.D. Tex. Mar. 9, 2015) [Dkt. No. 11]; In re Quicksilver Resources Inc., No. 15-10585 (Bankr. D. Del. Mar. 17, 2015) [Dkt. No. 13]; In re Endeavor Operating Corp., No. 14-12308 (Bankr. D. Del. Oct. 11, 2014) [Dkt. No. 7].

[10] For a case regarding the secondary term and automatic termination, see, e.g., Andarko Petroleum Corp. v. Thompson, 94 S.W.3d 550 (Tex. 2002).

[11] See In re Gen. Coffee Corp., 828 F.2d 699 (11th Cir. 1987) (describing the split).

[12] Section 541(b)(4)(A)(i) excludes from property of the estate the debt-or’s interest in oil & gas that “the debtor has transferred or has agreed to transfer. . . pursuant to a farmout agreement or any written agreement directly related to a farmout agreement,” thus potentially wrapping up further assignment agreements to third-parties into the safe harbor.

[13] For a court’s application of the safe harbor, see Tow v. HBK Main Street Investments, L.P., No. 14-03286 (Bankr. S.D. Tex. Mar. 10, 2015).

[14] It is important to again point out the difference in royalty inter-ests between those the debtor carved out and gave to a third party, and those that were retained by an initial transferee. While the for-mer might be governed by a rejectable contract or lease, rejecting the latter would arguably put non-debtor property into the estate. Case law is not great on categorizing this divide.

[15] A recent Michigan court decision actually termed an oil & gas lease a “true” unexpired lease subject to Bankruptcy Court section 365. See Frontier Energy, LLC v. Aurora Energy, Ltd., 439 B.R. 674 (Bankr. W.D. Mich. 2010).

[16] See, e.g., In re WRT Energy Corp., 202 B.R. 579 (Bankr. W.D. La. 1996) (finding that the oil & gas lease was neither an executory con-tract nor an unexpired lease); but see Texaco Inc. v. Louisiana Land and Exploration Co., 136 B.R. 658 (Bankr. M.D. La. 1992) (finding mineral lease to be an executory contract).

[17] Further, the conveyance documents might be executory con-tracts if state law considers the grant of an interest to not vest until production has begun, putting oil & gas leases for undeveloped land as potentially falling into the section 365 process. See Powell v. Ana-darko E&P Co., L.P., 482 B.R. 873 (Bankr. M.D. Pa. 2012).

[18] See, e.g., Wilson v. TXO Prod. Corp., 69 B.R. 960 (Bankr. N.D. Tex. 1987).

[19] Also note that even a successful perfection can be subject to avoid-ance. By securing an asset, you are essentially bumping the creditor up the waterfall into secured status. If done within 90 days prior to the bankrupt-cy—a year if the creditor is an insider—that grant could carry a preference risk. To see this issue in a recent case, see the plight of Caesars Entertain-ment Operating Company, where creditors filed an involuntary petition on a date to assure placing a collateral grant in the preference window.

[20] Again, this is a very general summary of securitization and there are additional means of perfection. For instance, a creditor’s “control” over the collateral is a common response to a perfection attack, especially when it comes to allegedly unperfected cash in a debtor’s bank accounts.

[21] Acts of perfection are exempted from the automatic stay. 11 U.S.C. § 362(b)(3).

[22] Treatises note an open question as to how far to relate back under the Texas statute: the day the service provider started the work that was never paid for, or just the first day it started working.

[23] As a perfection step is required and the requirements of that filing can be quite cumbersome, any filed service provider lien should be carefully scrutinized for avoidance potential. Further, there are additional filing requirements depending on whether the claimant is a contractor or subcontractor.

[24] See, e.g. Tex. Prop. Code. § 56.003.

[25] See Abella v. Knight Oil Tools, 945 S.W.2d 847 (Tex. App. 1997).

[26] While in Texas, the lien is unlikely to attach to a non-operator’s interest in the land, the statutes are unclear as to the expenses the non-operator pays to the operator. See, e.g., FDIC v. Mid-America Petroleum Inc., 83 B.R. 933 (Bankr. N.D. Tex. 1988).

[27] See Arrow Oil & Gas, Inc. v. SemCrude, L.P., 407 B.R. 112 (Bankr. D. Del. 2009) (Texas); Mull Drilling Col, Inc. v. SemCrude, L.P., 407 B.R. 82 (Bankr. D. Del. 2009) (Kanasas); Samson Resources Co. v. SemCrude, L.P., 407 B.R. 140 (Bankr. D. Del. 2009) (Oklahoma).

Disclaimer Any opinions, analysis or information provided in this article are not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.

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LEGAL ANALYSIS E&P INDUSTRY RESTRUCTURING ISSUES| 19 NOVEMBER 2015

ANNEX A: 2015 E&P and Related Bankruptcy Filings

Filing Date Company E&P or Related Jurisdiction / Docket Link

1/4/15 WBH Energy Partners LLC E&P WD Texas

1/15/15 GasFrac Energy Services E&P CCAA Proceeding / WD Texas [Ch. 15]

2/5/15 Calmena Energy Services Inc. E&P CCAA Proceeding / SD Texas [Ch. 15]

3/3/15 Cal Dive International Inc. E&P Delaware

3/8/15 Dune Energy E&P WD Texas 3/9/15 BPZ Resources, Inc. E&P SD Texas

3/17/15 Quicksilver Resources Inc. E&P Delaware

3/30/15 Laricina Energy Ltd. E&P CCAA Proceeding

4/9/15 Shoreline Energy E&P CCAA Proceeding 4/30/15 ERG Resources E&P ND Texas

5/6/15 American Liberty Oil Company LP E&P ND Texas

5/8/15 American Eagle Energy Corporation E&P Colorado

5/15/15 Duer Wagner Oil & Gas LP E&P ND Texas

5/17/15 Frac Specialists LLC Oilfield Service ND Texas

5/31/15 Oxane Materials Fracking Chemical Manuf. SD Texas 6/3/15 Primera Energy E&P WD Texas 6/9/15 Boomerang Tube Equipment Supplier Delaware

6/18/15 Saratoga Resources (Harvest Oil) E&P WD Louisiana

7/8/15 RREAF Oil & Gas Portfolio #2 Mobile Hotels for Drilling Sites WD Texas 7/9/15 Sefton Resources Inc. E&P Colorado

7/10/15 Arabella Petroleum E&P WD Texas

7/15/15 Milagro Holdings E&P Delaware 7/15/15 Sabine Oil & Gas Corporation E&P SDNY 8/6/15 Miller Energy E&P Arkansas

8/11/15 Black Elk Energy Offshore Operations LLC E&P SD Texas

8/13/15 Hercules Offshore E&P Delaware 8/31/15 American Natural Energy Corporation E&P ED Louisiana 8/31/15 Armada Operating E&P ED Texas 9/1/15 Buckingham Oil Interests Inc. E&P Massachusetts

9/7/15 Diverse Energy Systems LLC E&P SD Texas 9/15/15 Hovensa Refinery Virgin Islands 9/21/15 Elite Coil Tubing Solutions Equipment Supplier WD Louisiana

9/16/15 Samson Resources Corporation E&P Delaware

9/18/15 HII Technologies Oilfield Service SD Texas

10/12/15 CCNG Energy Partners LP E&P WD Texas 10/17/15 A&B Valve and Piping Systems LLC Equipment Supplier WD Louisiana 10/22/15 AIX Energy Inc. E&P ND Texas 10/23/15 Enseco Energy Services USA Corp. E&P CCAA Proceeding / Colorado [Ch. 15]

10/26/15 RAAM Global Energy Company E&P SD Texas

10/31/15 Republic Resources LLC E&P WD Texas

11/5/15 Escalera Resources E&P Colorado

11/9/15 Parallel Energy LP E&P Delaware

11/10/15 Strata Energy E&P CCAA Proceeding

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LEGAL ANALYSIS E&P INDUSTRY RESTRUCTURING ISSUES| 19 NOVEMBER 2015

-TABLE CONTINUES-

ANNEX B: 2015 E&P Out-Of-Court Transactions

Date completed

Company Exchanged for… Exchange

ratio / Price per share

Implied Premium

New Debt New Debt

Trading Level

New Debt Yield

02-Apr-15 Venoco Debt 77% 25 USD 150m of new 8.875% cash/12% PIK second lien N/A N/A

Mid April Halcon Resources Equity USD 1.78 42% - - -

Late April Halcon Resources Equity USD 1.82 19% - - -

29-Apr-15 Halcon Resources Equity USD 1.80 16% - - -

19-May-15 SandRidge Energy Equity USD 1.81 17% - - -

19-May-15 SandRidge Energy Equity USD 1.81 18% - - -

21-May-15 Midstates Petroleum Debt 80% 33 Portion of USD 504.1m in new third lien 10% cash/2% PIK notes due 2020.

41.5 41.6%

21-May-15 Midstates Petroleum Debt 80% 32 Portion of USD 504.1m in new third lien 10% cash/2% PIK notes due 2020.

41.5 41.6%

22-May-15 Warren Resources Debt 65% 6 USD 250m in a new five-year first lien term loan. N/A N/A

02-Jun-15 Midstates Petroleum Debt 70% 22 Portion of USD 20m in new third lien 10% cash/2% PIK notes due 2020.

41.5 41.6%

02-Jun-15 Midstates Petroleum Debt 70% 24 Portion of USD 20m in new third lien 10% cash/2% PIK notes due 2020.

41.5 41.6%

22-Jun-15 American Energy - Wood-ford

Debt 70% 22 USD 238m in new 12% second lien notes due 2020. N/A N/A

14-Jul-15 Lightstream Resources Debt 85% 21 USD 595m in new 9.875% second-priority senior secured notes due 2019.

59.4 28.7%

26-Aug-15 SandRidge Energy Repurchased 38% 10 Repurchased. - -

26-Aug-15 SandRidge Energy Repurchased 38% 12 Repurchased. - -

26-Aug-15 SandRidge Energy Repurchased 38% 13 Repurchased. - -

26-Aug-15 SandRidge Energy Repurchased 38% 13 Repurchased. - -

26-Aug-15 SandRidge Energy Debt 100% - Portion of USD 158.4m new 8.125% convertible sen-ior notes due 2022; Portion of USD 116.6m new 7.5% convertible senior notes due 2023.

26.26 40.4%

25.32 38.8%

26-Aug-15 SandRidge Energy Debt 100% - Portion of USD 158.4m new 8.125% convertible sen-ior notes due 2022; Portion of USD 116.6m new 7.5% convertible senior notes due 2023.

26.26 40.4%

25.32 38.8%

26-Aug-15 SandRidge Energy Debt 100% - Portion of USD 158.4m new 8.125% convertible sen-ior notes due 2022; Portion of USD 116.6m new 7.5% convertible senior notes due 2023.

26.26 40.4%

25.32 38.8%

26-Aug-15 SandRidge Energy Debt 100% - Portion of USD 158.4m new 8.125% convertible sen-ior notes due 2022; Portion of USD 116.6m new 7.5% convertible senior notes due 2023.

26.26 40.4%

25.32 38.8%

27-Aug-15 SAExploration Equity USD 4.23 8% - - -

02-Sep-15 Goodrich Petroleum Debt 50% 30 USD 27.5m of 5% convertible exchange senior notes due 2032.

N/A N/A

10-Sep-15 Halcon Resources Debt 65% 20 Portion of USD 1.02bn in new 13% third lien senior secured notes due 2022.

57.5 27.6%

10-Sep-15 Halcon Resources Debt 65% 20 Portion of USD 1.02bn in new 13% third lien senior secured notes due 2022.

57.5 27.6%

10-Sep-15 Halcon Resources Debt 65% 19 Portion of USD 1.02bn in new 13% third lien senior 57.5 27.6%

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LEGAL ANALYSIS E&P INDUSTRY RESTRUCTURING ISSUES| 19 NOVEMBER 2015

ANNEX B: 2015 E&P Out-Of-Court Transactions (continued)

Date completed

Company Exchanged for… Exchange

ratio / Price per share

Implied Premium

New Debt New Debt

Trading Level

New Debt Yield

08-Oct-15 Goodrich Petroleum Debt & Equity 50% 26 USD 38.25m of 8.875% second lien senior secured notes due 2018.

N/A N/A

08-Oct-15 Goodrich Petroleum Debt 45% 21 USD 36.8m of 8.875% second lien senior secured notes due 2018.

N/A N/A

14-Oct-15 Goodrich Petroleum Debt 50% 30 USD 8.5m of 5% convertible exchange senior notes due 2032.

N/A N/A

16-Oct-15 SandRidge Energy Debt 100% - Portion of USD 269.4m new 8.125% convertible sen-ior notes due 2022; Portion of USD 30.6m new 7.5% convertible notes due 2023.

26.26 40.4%

25.32 38.8%

16-Oct-15 SandRidge Energy Debt 100% - Portion of USD 269.4m in new 8.125% convertible senior notes due 2022; Portion of USD 30.6m new 7.5% convertible notes due 2023.

26.26 40.4%

25.32 38.8%

16-Oct-15 SandRidge Energy Debt 100% - Portion of USD 269.4m in new 8.125% convertible senior notes due 2022; Portion of USD 30.6m new 7.5% convertible notes due 2023.

26.26 40.4%

25.32 38.8%

16-Oct-15 SandRidge Energy Debt 100% - Portion of USD 269.4m in new 8.125% convertible senior notes due 2022; Portion of USD 30.6m new 7.5% convertible notes due 2023.

26.26 40.4%

25.32 38.8%

16-Oct-15 SandRidge Energy Repurchased 30% 2 Repurchased. - -

16-Oct-15 SandRidge Energy Repurchased 30% 4 Repurchased. - -

16-Oct-15 SandRidge Energy Repurchased 30% 5 Repurchased. - -

22-Oct-15 Warren Resources Debt & Equity 64% 5 Five-year second-priority USD 51m term loan facility. - -

26-Oct-15 EXCO Resources Debt 54% 28 Portion of five-year USD 291m 12.5% second lien "exchange" term loan.

- -

26-Oct-15 EXCO Resources Debt 44% 20 Portion of five-year USD 291m 12.5% second lien "exchange" term loan.

- -

PULLED RAAM Global Energy Debt & Equity 21% -1 USD 50m of 12.5% senior secured notes due 2019. - -

TBD EXCO Resources Debt 45% 18 Portion of five-year USD 109m 12.5% second lien "exchange" term loan add-on.

- -

TBD EXCO Resources Debt 39% 16 Portion of five-year USD 109m 12.5% second lien "exchange" term loan add-on.

- -

TBD California Resources Debt 80% 7 Portion of new USD 1bn 8% second lien notes due 2022

- -

TBD California Resources Debt 80% 11 Portion of new USD 1bn 8% second lien notes due 2022

- -

TBD California Resources Debt 80% 12 Portion of new USD 1bn 8% second lien notes due 2022

- -

2015 Comstock Resources Repurchased 37% - Repurchased. - -

2015 Comstock Resources Repurchased 37% - Repurchased. - -

Sources: SEC Filings, Management Presentations, Company Press Releases, MarketAxess, FINRA