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Analysts see rising likelihood of ‘Chapter 22’ bankruptcies in U.S. oil and gas sector

November 16, 2020

S&P Global Market Intelligence ($):

More oil and natural gas companies will likely file for bankruptcy protections a second time as fallout from the COVID-19 pandemic continues to wreak havoc on balance sheets, industry experts said.

Drillers such as Ultra Petroleum Corp. and Chaparral Energy Inc. and oilfield services providers such as Pacific Drilling SA initiated “Chapter 22” proceedings, a euphemism for second Chapter 11 bankruptcy filings, in 2020 after restructuring just a few years earlier in the wake of a previous commodity price downturn. According to David Jones, chief judge for the U.S. Bankruptcy Court for the Southern District of Texas, these companies did not implement the right capital structure the first time around, even though creditors were on board and all legal requirements were satisfied.

“I will be very candid and acknowledge that I have approved plans that everyone said, you know, “This is going to fix the problem — this is the right way out,’ and I looked at it and go: ‘There’s no way,'” he said during a panel at Rice University’s virtual energy finance summit Nov. 13, “I’m not going to substitute my own judgment.”

Companies that are looking to get out from under insolvency again could turn to out-of-court measures, but a full-on restructuring is more efficient and comprehensive. “To the extent that they participate in an out-of-court exchange and they basically take a 2021 bond and turn it into a 2025 bond, they haven’t fixed capital structure,” said Bassam Latif, managing director at restructuring advisory firm Moelis & Co. “They haven’t fixed the operations of the company. The cash burn and liquidity burn will continue.”

Latif and Jones expected to see additional Chapter 22 proceedings.

When it comes to whether midstream providers’ contracts are protected during upstream bankruptcy proceedings, courts’ decisions so far have been mixed. Midstream gathering and processing agreements are often written as real property interests. A real property interest is tied to the property, and it cannot be rejected in bankruptcy. Gas transportation agreements, however, take the form of executory contracts. Most recently, Jones ruled that Chesapeake Energy Corp. can throw out a natural gas purchase agreement with Energy Transfer LP’s ETC Texas Pipeline Ltd. because it did not satisfy the requirements for a real property interest “running with the land,” as opposed to obligating the debtor or another party to fulfill its terms at a later date.

[Allison Good]

More ($): Industry experts expect additional ‘Chapter 22’ bankruptcies in oil, gas patch

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