Risks And Opportunities In Distressed Oil And Gas

In this eight-week alert series, we are providing a broad look at current and emerging issues facing the energy sector. Attorneys from across the firm will discuss issues ranging from environmental disclosures and risk management in business transactions to insolvency, compliance programs and intellectual property. Please click here to read all of our recent publications.

Recent volatility in the energy markets has put increasing stress on the capital structures of companies operating in those markets. When commodity prices were higher between 2010 and 2014, many of those companies took on significant amounts of debt to pursue new opportunities.1 Starting in 2014, oil prices dropped precipitously, and since then have remained at record lows. This unique economic environment presents companies operating in this space (and their directors and officers) with numerous challenges involving complicated business and legal issues. This article focuses on three scenarios that an energy company may face depending on its particular financial situationover-leverage, risk isolation, and strategic opportunitiesand discusses some of the legal considerations with respect to each. Indeed, many of these scenarios have played out in one form or another across a variety of companies over the past 18 months. The range of issues a company may confront depends to some extent on its overall financial position. At one end of the spectrum, highly-levered companies with significant debt loads may have difficulty complying with their current obligations (or may expect those difficulties on the horizon), but they may also be able to mitigate their financial situation by seeking to refinance or restructure a portion of their existing debt. Companies that are financially healthy, at least on an overall basis, often face different issues. Those companies may want to isolate or divest potential sources of financial stress to stem losses or to minimize the risk that they could adversely affect the enterprise as a whole. Finally, at the other end of the spectrum are companies that, given their relatively strong current financial condition, may in a position to take advantage of current market opportunities presented by the abundance of businesses that are not as healthy. Companies in these situations should focus on the risks attendant to taking such opportunities. Highly-Levered Companies May Face Obstacles and Opportunities As noted above, many energy companies took on substantial amounts of debt during a period of higher commodity prices and more generous credit...