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The Best Protection: Safeguards in Purchasing Distressed Oil and Gas Assets
February 08, 2016
In the current environment of depressed prices for oil, natural gas and related liquids, oil and gas wells, leases and properties are coming on to the market for sale. These assets typically are made available through either bankruptcy proceedings by exploration and production companies or companies that are selling assets to bring their credit facilities into compliance with overarching covenants.
Each situation is an opportunity for a buyer, but with caution about the quality of such purchases, many of which are generated by the current depressed state of the market. Here are some of the issues to anticipate:
  • State and federal regulatory agencies are inspecting fewer operating facilities and so are having operational inspections where none occurred before, and increased enforcement inspections should be expected.
  • Existing leases with depleted primary terms are often subject to top-leases or conditional lease terms in a market where speculators rather than main-line industry operators are currently active.
  • Look for statutory liens that might be used by unpaid contractors and suppliers that are not immediately obvious from recorded documents.
  • Look for latent environmental issues such as signs of drilling pad slippage, water runoff issues and incursions into wetland areas which can result from underfunded operations.
  • Due to the decline in drilling new wells and related operations as well as statutory limitations on tort claims, trial attorneys are increasingly searching for smaller stakes nuisance claims such as dust, odor, light and noise complaints about existing drill pads and similar claims related to the trucking of liquids and flow-back fluids from such drill pads.     
If one is a potential buyer, then the challenge is to dig deeper in due diligence than normal and discount the representations and warranties of a distressed seller. Careful inspections of existing and proposed drill pads are essential to gauge the potential for environmental issues as well as complaints by neighboring residents. An examination of permitting and enforcement records could reveal the potential for either new regulatory oversight or private tort claims.
Purchasing distressed assets from a bankruptcy case is a mixed blessing. On the positive end, the discharge order in bankruptcy can extinguish some existing liabilities. However, potential purchasers have a much shorter period for due diligence, and the discharge does not eliminate environmental liabilities and liabilities which have their source before the bankruptcy but do not become apparent until afterward.
There are bargains coming into the current market, but the assets involved need to be more carefully inspected due to the challenging energy environment.

If you have any questions about this issue, please contact us.

Energy Law William M. Herlihy