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Acquiring Oil & Gas Assets From a Distressed Seller Outside of Bankruptcy

Christopher L. Richardson, Financial Distress in the Oil & Gas Industry

Since the summer of 2008, the oil and gas industry has been hit with a series of extraordinary changes both within the industry and in the world's financial markets. Beginning with the belief frequently discussed in 2007 and 2008 that the world had reached “peak oil,”1 oil was rightly viewed as a finite resource. With the rapidly increasing demand emanating from the robust economies of China and India, it was widely believed that the world was rather quickly going to have to pay significantly more for this dwindling but essential commodity. Prices for oil and gas spiked in the United States, pushed upward in part by the weakening of the U.S. dollar. Banks, hedge funds and private equity companies flooded oil and gas companies with their funds following the upward spike in energy prices. Second lien financings were common with the lenders and borrowers confident that such increased debt levels were sustainable and preferred over dilution that would result from an IPO or follow-on offering.

Economists have debated the point, but it is not clear whether the price spike in oil and gas in the first half of 2008 was demand-driven or the convergence of a series of speculative forces.2 The increase in price was rapid and to many, sustainable. Whatever the precise cause, the next chapter of this story is well known. Oil and gas prices plummeted in the fourth quarter of 2008, wi