Distressed M&A

Distressed M&A: Current Trends

Matt Ferris – Restructuring Michael A. Freeman – M&A; Energy 214.651.5955 214.651.5362 [email protected] [email protected]

HAYNES AND BOONE OIL PATCH BANKRUPTCY MONITOR

250

15 9 200 13 5 4 6 12 6 150 8 7 2 7 9 10 100 34 NUMBER OF FILINGS NUMBER

17 50 14 17 7

0 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Cumulative bankruptcies New bankruptcies since the previous quarter

(As of December 31, 2019) 1

HAYNES AND BOONE OIL PATCH BANKRUPTCY MONITOR

$140

$120

$100

$80 BILLIONS $60

$40

$20

$0 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

(As of December 31, 2019) 2

CANADA MINNESOTA 18

MONTANA 1 1 MICHIGAN MASSACHUSETTS WYOMING 1 10 1 1 NEVADA 2 NEW YORK NEW JERSEY 2 1 UTAH COLORADO 1 CALIFORNIA 2 KENTUCKY 1 5 11 1 PENNSYLVANIA 3 DELAWARE ARIZONA NEW OKLAHOMA ALASKA 32 MEXICO 1 6 VIRGINIA 1 1 WEST TEXAS VIRGINIA 94 11 ALABAMA LOUISIANA

(As of December 31, 2019) 3

ALABAMA $212,726 MONTANA $83,726,167 ALASKA $217,158,133 NEVADA $1,042,675 ARIZONA $3,699,213 NEW JERSEY $1,024,566 DELAWARE CALIFORNIA $23,793,425,757DELAWARE $71,772,722 NEW MEXICO $25,211,350,343 $1,286,649 CANADA $1,710,380,228 OKLAHOMA $553,310,479 COLORADO $472,109,287 PENNSYLVANIA $2,009,791,901 KENTUCKY $15,381,247 UTAH TEXAS $274,640,449 TEXAS NEW YORK LOUISIANA $57,451,081,928 $20,306,579,582NEW YORK $592,922,110 VIRGINIA $68,681,104,491 $1,250,928,395 $20,308,779,582 MASSACHUSETTS $3,578,276 WEST VIRGINIA $40,865,611 MICHIGAN $1,558,932 WYOMING $117,302,400 MINNESOTA $1,233,733

(As of December 31, 2019) 4

Out of Court/Contractual Sales

Foreclosure Sales

Chapter 11 Plan Sale

Stand Alone Bankruptcy 363 Sale

► Speed of Process ► Transfer of assets free and clear of liens, claims and encumbrances (often without the lienholder’s or claimholder’s consent) ► Transfer of otherwise non-assignable contracts and leases ► **Rejection of burdensome contracts and leases** ► Avoidance of exposure to claims under fraudulent transfer laws ► Limited exposure for breach of representations and warranties; limited buyer recourse

Break Up Fee Expense Reimbursement Overbid Requirements Topping Fee Bid Increments

Almost always: Reimbursement of Reasonable and Necessary Expenses (sometimes capped) Sometimes: Percentage of Proceeds (break-up fee average is approximately 3.0%) Sometimes: A percentage fee, plus expense reimbursement Amount of fees and expenses cannot have a “chilling effect”

§ In bankruptcy sale situations, due diligence period is often accelerated § A strategic consideration for a prospective Stalking Horse is to propose a very abbreviated due diligence period § Competing bidders and other constituents may argue for extending proposed due diligence time frames

§ Title and environmental due diligence in upstream transactions must be conducted prior to signing a definitive agreement v Limited period between signing and closing for topping bidders v No traditional adjustment mechanics

§ Purchaser will have an opportunity and a time frame to decide which contracts or leases will be assumed and assigned § Assumption and assignment will require a cure of defaults – which will impact net sale proceeds § Bankruptcy allows for assignment of contracts and leases notwithstanding anti-assignment restrictions with limited exceptions § Purchaser must establish / provide adequate assurance of future performance § Burdensome contracts and leases can be rejected

§ In re Sabine Oil and Gas Corporation (2016) § New York court interpreted Texas law § Sabine was a Texas-based E&P company that had pre-petition gas gathering agreements with two service providers § Sabine wanted to reject the agreements because it was no longer financially viable for it to deliver the minimum amounts under the agreements

§ General Rule: Agreements that “run with the land” are not executory contracts that can be rejected under the Bankruptcy Code

§ Sabine Court’s Conclusion: v The agreements concerned Sabine’s interest in personal property (the extracted gas and condensate) and did not affect its real property interests v The Court found that the agreements were executory and could be rejected in the bankruptcy proceeding

§ The Sabine decision was upheld by the Federal appellate court

§ Fast forward to December 20, 2019

§ In re Alta Mesa Resources, Inc. (2019) v Texas court this time, but interpreting Oklahoma law

§ Alta Mesa Court Conclusions: v (1) The dedications in the gathering agreement created covenants that “run with the land” and cannot be rejected in bankruptcy

AND

v (2) The requirements to form a real property covenant in Texas mirror those in Oklahoma ü the Alta Mesa court thereby suggesting its conclusion would have been the same if the case had been decided under Texas law

§ Takeaways from Sabine and Alta Mesa: v There is uncertainty at this point regarding the standard in Bankruptcy Courts v Sabine interpreted Texas law (but by a New York bankruptcy court) v Alta Mesa interpreted Oklahoma law (but by a Texas bankruptcy court, with a suggestion that Texas law was the same)

v The laws of a particular state will determine whether an agreement contains covenants that “run with the land”

v Agreements can be fixed ü The courts have provided clues for necessary language in agreements to ensure a real property interest is granted

Q/A Session to Follow

Matt Ferris Restructuring 214.651.5955 [email protected]

Michael A. Freeman M&A; Energy 214.651.5362 [email protected]

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