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Buying and Selling Oil & Gas Assets in Bankruptcy

Rhett G. Campbell, Financial Distress in the Oil & Gas Industry

“Oil and gas exploration and production is a particularly complex business.” In re Gulf Coast Oil Corp., 404 B.R. 407, 411 n.3 (Bankr. S.D. Tex. 2009). Companies engaged in oil & gas exploration and production (“E&P”) have always been prime candidates for financial reorganization for several reasons: the high cost of exploring and producing hydrocarbons; low barriers to entry into the market; the lure of high returns; and cyclical commodity prices. The “high risk, high reward” nature of the upstream E&P industry means that many try and many fail. This explains, in part, why chapter 11 seems to attract E&P companies with regularity. Once a company with hydrocarbon assets files chapter 11, a common outcome is a sale of the assets (or the equity of the company) either through a formal sale process or through an opportunity for competing parties to file a plan of reorganization. As high quality E&P assets in the continental United States become harder to find, it has become more common for prospective purchasers of hydrocarbons to view chapter 11 as a potential source of acquisition targets. An understanding of the rules of chapter 11 and of purchases through bankruptcy are important to those entities who wish to consider buying oil & gas assets through the bankruptcy process.

Bankruptcy trustees and debtors in chapter 7 and chapter 11 cases conduct private sales and true