Energy & Infrastructure Insight - Issue 3

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7 MULTI-STAGE AUCTION A sale process pursuant to Section 363 of the Bankruptcy Code typically includes two stages of auctions. The initial selected bidder on the assets of a bankrupt company, known as a stalking-horse bidder, agrees to set a floor price, ensuring a minimal recovery to creditors. Thereafter, interested parties bid against the stalking horse. In exchange, the stalking horse typically obtains court- approved bid protections, including a break-up fee and expense reimbursement that compensate the stalking horse for its opportunity cost and the value provided to the bankruptcy estate should the stalking-horse bid induce any higher or better bids. Therefore, a stalking-horse bidder should consider the risk of being outbid at an auction when negotiating the terms and conditions of the purchase agreement, maximize the scope of its bid protections and ensure that any court-approved bidding procedures are as favorable to its bid as possible. CREDITOR INFLUENCE ON NEGOTIATIONS The bankruptcy court must approve the purchase agreement in connection with any purchase of assets from the debtor. In connection therewith, the bankruptcy court has broad discretion to consider the objections of the seller's creditors, including those with liens on the assets at issue, those holding blocking debt positions on the terms of any Chapter 11 plan and any post-petition DIP lenders that otherwise have material consent rights. As a result, a buyer must consider how the seller's creditors may react when negotiating the terms and conditions of the purchase agreement. In some instances, negotiating directly with such creditors on the terms of a Chapter 11 plan can minimize public competition and otherwise improve the position of a potential buyer. In any case, a buyer should structure its bid to maximize the extent to which it may acquire assets free and clear of liens, claims and other liabilities of the seller under Section 363(f) of the Bankruptcy Code. EXECUTORY CONTRACTS, "CURE" COSTS AND CONSENT TO ASSIGNMENT PROVISIONS An "executory contract" is a contract under which unperformed obligations remain on both sides, such that either party would be excused from performance if the other party were to breach its remaining obligations. Section 365 of the Bankruptcy Code provides the debtor the option to reject, assume, or assume and assign its executory contracts in bankruptcy. Many contracts commonly entered into in the oil & gas industry, including joint operating agreements, vendor contracts, farmout agreements and midstream agreements, may qualify as executory contracts under the Bankruptcy Code. Therefore, it is important for a buyer to identify material contracts that may qualify as executory contracts and timely direct the debtor as to those executory contracts that will be assumed by the debtor and assigned to the buyer pursuant to the bankruptcy process. This process is typically addressed in any purchase agreement as well as in the sale motion and related orders proposed to the bankruptcy court. In order for a seller to assume and assign any executory contract, it must cure any defaults with respect to such executory contract. The amount and allocation of responsibility for payment of such "cure costs" is a key consideration when buying assets pursuant to the bankruptcy process. Although cure costs are technically the seller's responsibility, a buyer can increase the value of its bid by assuming all or some portion of them. Key Considerations When Buying Oil and Gas Assets From Distressed Companies The oil & gas industry is facing unprecedented challenges following the price decreases and market unrest caused by the COVID-19 pandemic, and more than 20 oil and gas producers have filed for bankruptcy already this year. Many more exploration and production and oilfield service companies are in serious financial distress and, for those with capital to spend, there will be opportunities to acquire assets and distressed companies (including acquisitions of asset packages, acquisitions of companies, and take-private transactions). With the likelihood of continuing uncertainty, this article will look at some of the key considerations for buyers when evaluating potential acquisitions of distressed oil and gas assets in the months ahead.

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