June 04, 2015

Dealing With Fractional Oil, Gas Interests In Bankruptcy

Brandan Oliver and Matthew Clark, associates in Faegre Baker Daniels' Denver and Boulder offices, respectively, recently collaborated in an article discussing legal interpretations of financing arrangements in the oil and gas industry during bankruptcy proceedings. Published in Law 360, the article noted that low oil and gas prices have led some borrowers in the industry into bankruptcy, a process that brings complex financings and transactions related to oil or gas production projects under legal scrutiny.

"During an oil or gas production project,a mineral estate can be—and frequently is—split into a number of fragments called fractional interests," the article said.

Oliver and Clark evaluated a 2014 Texas bankruptcy case, NGP Capital Res. Co. v. ATP Oil & Gas Corp., as an example of how certain types of these contracts may be "recharacterized" as loans in the eyes of the bankruptcy court.

"The crux of the ATP decision was whether the purported ORRI transaction should be recharacterized from a real property conveyance to a debt financing as a matter of law," the article said.

Though this particular case settled before the court issued a ruling, Oliver and Clark said that the prospect of such “recharacterization” has significant financial implications.

"If the ATP court ultimately recharacterized the ORRI conveyance as a disguised financing, then NGP might have ended up as a mere unsecured creditor, likely recovering pennies on the dollar."

Full Article

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