John Grand of Vinson & Elkins in Dallas. (Courtesy photo)
Andrews Kurth Kenyon represented Torrent Oil of Houston in its recent acquisition of upstream Gulf Coast oil and gas assets in a Section 363 sale in Linc Energy’s Chapter 11. That deal, while relatively small but key for the young Torrent, is an example of a transaction that is keeping some Texas firms busy as energy companies cope with stubbornly low commodity prices and overleveraged balance sheets.
Distressed-asset purchases like Torrent Oil’s $37.5 million acquisition is providing work for firms in Texas with energy practices and expertise in the bankruptcy/restructuring area, as more and more energy companies sell off assets to raise cash or sell assets through bankruptcy.
“Being on the oil and gas side, practically all of my clients ask if you have capacity of doing a distressed assets deal, whether in a 363 or before it goes to bankruptcy,” said Charles Ofner, a partner in Andrews Kurth in Houston who worked on the purchase for Torrent, which was founded in 2015. “Any firm in town that has a decent bankruptcy practice and energy practice will be doing the same thing.”
Tom McCaffrey, a partner in Akin Gump Strauss Hauer & Feld’s Houston office, said firms need the skill sets of energy-transactions lawyers along with financial restructuring lawyers. “It’s multidisciplinary,” he said, noting that many firms in Texas may have the energy-transactions expertise, but didn’t have the need until recently for restructuring as well. “Over the last couple years it has been very, very busy for some firms. Some firms have not had what I will call the same level of activity. It requires a certain expertise,” he said.
Robin Russell, a partner at Andrews Kurth Kenyon in Houston who is co-chair of the firm’s national bankruptcy and restructuring practice, said lawyers in her group do typically team up with transactional lawyers on distressed asset sales and purchases. “You need a bankruptcy attorney because they know the ropes and auction dynamics and getting all of the bid procedures to comply with, and a transactional attorney who will mark up the business transaction agreement.” In the case of a 363, some distressed assets are purchased by a “stalking horse” that does due diligence to help set a market value, and some, like the Torrent asset-purchase situation, end up in an auction.
Clearly, the price of oil has affected energy companies. As of Dec. 1, the price of a barrel of West Texas Intermediate crude moved above $50, up from $29 in January, but way down when compared with $145 in the summer of 2008, or about $110 in June 2014. John Grand, a Vinson & Elkins partner in Dallas, said he started seeing distress in the industry once commodity prices fell in the latter half of 2014.
“There was a wave of bankruptcies filed in 2015. The M&A deals that were done in 2015, when it involved distressed assets, was a distressed seller not necessarily involving bankruptcy. The 363s started picking up at the end of 2015,” he said.
Because commodity prices have stayed low for so long, lawyers said the sale of distressed assets during the current energy industry downturn is different from past cycles. Steve Pezanosky, a partner in Haynes and Boone’s Fort Worth office who has done bankruptcy and restructuring work for 25 years, said in prior down cycles, overleveraged exploration and production companies forced into bankruptcy would nine times out of 10 sell oil and gas properties via a 363 transaction, which is a method that minimizes risk for the buyer because the sale comes with more liability protection than through a private sale.
“In this cycle, although we have seen some of that, that has not really been the playbook for all of the cases. I would say in at least half of the cases that have gone in with a restructuring plan, that has been more or less worked out with the bankruptcy filing [and] almost always involves a debt-for-equity conversion,” he said.
Pezanosky said the Samson Resources Chapter 11, which was filed in September 2015 in Delaware, is probably the best and most active example of asset sales through a Section 363. Anthony Speier, a Houston partner in Kirkland & Ellis, which represents Tulsa-based Samson in the bankruptcy, said Samson recently got court approval for six individual asset sales under Section 363. He said Samson is selling off noncore assets and plans to restructure around the remaining assets. “That’s been the biggest divesture in the energy space, the Samson deals,” Speier said. The asset sales totaled nearly $660 million.
Speier said Kirkland’s representation of debtors such as Samson and other energy companies including Sabine Oil & Gas Corp. and Linn Energy, has provided considerable work for the firm. “From our perspective certainly, representing debtor clients, it definitely is busier,” he said.
According to the Haynes and Boone Oil Patch Bankruptcy Monitor, a total of 105 North American energy companies filed bankruptcies in the time period between January 2015 and Oct. 19. While his firm tracks energy-sector bankruptcy filings, Pezanosky said he knows of no statistics on 363 asset sales.
Firms are also helping companies with distressed finances that have thus far avoided bankruptcy court. “With the distressed sellers prebankruptcy, we’ve seen a lot of activity where those sellers are trying to find ways to push out and extend liquidity, and really working to come up with any creative transaction,” Grand, the V&E lawyer, said. “We’ve seen a lot of term sheets for different structures, joint venture structures. The private-equity funds have raised large amounts of capital to do these investments.”