Bankruptcy and Financial Restructuring

Oil and Gas Bankruptcies: The Fallout After the Boom

By November 7, 2016 September 24th, 2018 No Comments

Although oil prices may be on the rebound, the uptick comes at a time far too late to save many oil and gas companies. Diminished cash flows as a result of a reduction in production and low oil prices have made it difficult to repay the debt accumulated when oil prices were booming. Since the beginning of 2015, at least eighty-one (81) North American oil and gas producers have filed for bankruptcy. The largest to date, Pacific Exploration & Production Corporation, filed bankruptcy in April 2016 listing over $6 billion in debt. Samson Resources Corporation, a corporation with many of its primary assets located in North Dakota, is the third largest to date, listing approximately $4.3 billion in debt. North Dakotans have also been impacted by other large oil and gas bankruptcies, including Magnum Hunter Resources Corporation and Intervention Energy Holdings, LLC. In total, North American oil and gas debtors have listed upwards of $53 billion in debt on their bankruptcy filings.

Under the United States Code, corporations file for bankruptcy in the state where their principal place of business is located. A corporation’s principal place of business is defined by where its officers direct, control, and coordinate its activities, basing the focus more so on the managerial level rather than the production nerve center. Of the eighty-one (81) North American oil and gas producers that filed for bankruptcy in 2015 and so far in 2016, half of those filings have occurred in Texas. Delaware has seen the second most filings with thirteen (13), followed by Canada with eight (8). Those locations are followed by filings in Colorado, Louisiana, New York, Oklahoma, Alaska, Alabama, Massachusetts, and Virginia. Although many of the oil and gas companies have operations in North Dakota, none of them have filed bankruptcy here.

The United States Bankruptcy Code authorizes that corporations can enter bankruptcy in one of two ways. The first is a voluntary bankruptcy filing which is initiated by the corporation that will be the debtor. The vast majority of bankruptcy filings occur voluntarily. The second way to enter bankruptcy is through an involuntary bankruptcy filing which occurs when an individual or an entity other than the debtor corporation files for bankruptcy on behalf of the corporation because the corporation is generally not paying its debts as they become due. This determination, and ultimately whether the case moves forward, is made by the bankruptcy court. Although the vast majority of the oil and gas bankruptcy filings have been voluntary, several corporations, including Whistler Energy II, LLC, and Aurora Gas LLC, have been forced into bankruptcy involuntarily.

The substantial majority of the North American oil and gas producers who have filed for bankruptcy have petitioned under either Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code. Under Chapter 7, a corporation stops all operations and a trustee is appointed to liquidate the corporation’s assets. Money collected from liquidating assets is then used to repay creditors.

A Chapter 11 bankruptcy allows a corporation to develop a plan for reorganization and to try and become profitable again. Management continues to run the day-to-day business operations, but significant business decisions must be approved by the bankruptcy court. Many of the oil and gas producers that have filed under Chapter 11 negotiated agreements with their creditors prior to filing in an attempt to make the bankruptcy process as streamlined as possible.

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