NEW YORK--(BUSINESS WIRE)--Oil exploration and production (E&P) companies are facing greater odds of filing for bankruptcy as a function of continuously low oil prices. The treatment of mineral rights derived from land lease agreements, servicing agreements and financing agreements directly influences the recovery prospects of those rights holders and other stakeholders, according to Fitch Ratings.
E&P companies encounter special complexity in bankruptcy due to various interests conveyed to and from them in the ordinary course of business. Landowner lease agreements, which are the backbone of an E&P's operation, are treated differently depending on which jurisdiction in which an E&P files for bankruptcy. For example, in Texas, the agreement is neither an executory contract nor an unexpired lease, but rather it is treated as a transfer of real property and, hence, is not subject to avoidance power. In contrast, in Louisiana, the agreement is not treated as an executory contract but as an unexpired lease; therefore, an E&P must assume or reject the lease within a specific period. It remains unclear how other oil-rich states will treat the land lease.
In addition, E&P companies carve out rights such as production payments and net profits interests, overriding royalty interests as consideration for financing deals and service agreements. Those rights can be either treated as a real property right that precludes the recipient from participating in bankruptcy or as a personal property right that allows the recipient to file eligible claims in bankruptcy. The complexity of those issues directly influences who can participate in bankruptcy and what the enterprise value is for the purpose of recovery.
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For additional information on this topic, see Fitch's special report titled "Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries: Fitch Cases Studies - Edition VII," dated April 27, 2015, available at www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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