Transcript 3B. Lights Out: Energy Bankruptcies

Lights Out: Energy Company
Bankruptcies
Terry Hall, Partner
[email protected] 317-237-1230
Faegre Baker Daniels LLP
Indiana Chamber of Commerce Energy Conference August 2016
Energy Industry
► There
have been 76 energy bankruptcy filings in North America with
debt valued at $43 billion for the first six months of 2016, compared to
28 filings valued at $4 billion in debt for the same time period last year.
► Fifty
percent of the coal production in the US is in bankruptcy or has
filed bankruptcy
► Abengoa
Bioenergy and Sun Edison in renewables in 2016; Solyndra,
Sun-Tech, Abound Solar, 123 Systems LLC, Aventine Renewable
Energy Holdings, Fisker, Ener1, Vehicle Production Group
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Oil & Gas
•
Oil company bankruptcies began in 2014,
picked up in 2015 and continue to accelerate in
2016
•
An estimated 175 E&P companies are at high
risk for bankruptcy
•
Companies are cutting new exploration and
drilling fewer wells. Six new oil and gas
development projects were approved in 2015
(Morgan Stanley reported by The Wall Street
Journal). Drilling rigs in seven key US regions
has declined sharply.
•
The race to add to reserves through exploration
has slowed by the current glut of supply and
corresponding low prices are discouraging
companies from investing in exploration
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Oil Bankruptcies
► July
1, 2014 through 2015, 35
exploration and production
(E&P) oil companies filed
bankruptcy. $18 billion in total
debt .
► As of June 30, 2016, 43 more
E&P companies filed,
representing approximately $44
billion total debt.
► Jan 2015 through June 2016, 83
Oilfield Service companies filed
to restructure $13 billion of debt.
► Upstream/Exploration
&
Production
Finding, leasing, drilling
► Midstream
Transporting, storing
► Downstream
Refining, distribution,
marketing, point of sale
► Oilfield
Services
Contract drilling, fracking,
equipment, construction,
software, engineering
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Oil Company peculiarities – Price Takers
Complicated three and four tier debt structure
86% of operating profits used to cover interest payments
► Reserves serve as collateral – need to continuously explore and find new reserves –
value of reserves fluctuates with market and reduces the borrowing base
► $50 oil = profitability, but cash won’t cover the 3-6 months to restart well
► Numerous types of property interests – working interest, royalty, operating interest,
overriding royalty interest, Joint Operating Agreements (JOA) – state laws control
type of property and whether it is in the bankruptcy estate
► Numerous kinds of production based payments – volume based payment, fixed
dollar amount based on production, percent of proceeds
► Bankruptcy decisions beginning to redefine “settled rights” – what is property of the
estate
► Litigation risks – new investigations by States’ AG on disclosure
► SEC climate risk disclosures
►
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Coal Companies
► Companies
representing nearly half of the US coal production have
filed bankruptcy
► 28 coal companies have filed over the last 4 years and 260 mines
have closed
► Insolvency Factors
Electricity production share fell to 29% in 2015 from 50%
Natural Gas prices competing
Bets on metallurgical coal (acquisitions)
Depending on Exports which have fallen
Climate Change and other Regulations and Attitudes
► Employment
– 700,000 coal related (ACCCE), 53,000 direct coal
employment (DOL)
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Coal Bankruptcy Considerations
► Labor
Collective Bargaining Agreements
Retiree Benefits and the Coal Act
► Environmental
Regulations
Reclamation liabilities
self-bonding
OSMRE oversight and new guidance
► Contractual
Anti-assignment clauses
Royalty
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Renewables
► Wind
& Solar companies
60 solar companies closed in
2011 and 2012 due to over
capacity and price pressure
from overseas. 17 companies
in 2014-15. Abengoa and Sun
Edison in 2016
Abengoa’s Spanish parent
driving the US company’s
issues
120 wind companies (mainly
turbine manufacturers) closed
in the past two years (18 in
North America)
►
Insolvency drivers
Technology did not prove out
Development costs were too high
when market prices dropped
Too many market entrants
Uncertainty in regulatory and
incentives
►
Bankruptcy Issues
►
Lien and lease issues
Environmental issues
Government loans/incentives
Employment
Solar 200,000 (2015)
Wind 88,000
Effects of Energy Industry Insolvency
► Individual
bankruptcies by employees
► Secondary service company filings are up
► Pension and retirement plans being abandoned
► Institutional divestment in extractive energy
► Environmental Liabilities being pushed onto tax payer
►
General Bankruptcy Issues
►Prepetition
v. administrative claims
►503(b)(9) claims
►Automatic stay
►Preference exposure
►Fraudulent transfer exposure
►Lien avoidance
►363 sales and the effect of credit bidding on claims
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Being Prepared
►
Supply Chain Exposure
SEC filings
Court cases
►
Slow Pay and Irregular Payments
►
Contract Terms (do you have a written contract?)
Forward contracts safe harbor
Interest and attorneys’ fees
Assignment clauses
Guarantees
Security
Subordination
Liquidated damages clause
►
Invoices – terms and prepayments
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Changing Attitudes
► 15%
of Americans say there is no
solid evidence for climate change
(reduction from 24% in 2015)
► 66% believe that Earth is warming
► Confidence levels of those who
believe warming is occurring and
those who believe warming is not
occurring has increased
► 39% of Republicans, 69% of
Independents, and 78% of
Democrats believe there is solid
evidence that the earth is warming
► Companies
are adopting
sustainability and responsibility
goals that affect suppliers
► SEC requirements on public
companies (current attorneys’
general investigations)
► Green Bond Banks
► EPA requires GHG emission
reporting (10,000 entities)
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