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Distressed Assets and Companies--Financing Issues

David R. Payne, Phillip L. Lamberson, Charles A. Beckham, Jr.,, Charles Carroll, Financial Distress in the Oil & Gas Industry

I. OUT OF COURT/PRE-BANKRUPTCY ISSUES

Restructuring and/or replacing the debt financing for distressed exploration and production companies (“E&P Companies”) and their counterparts in other extractive industries with depletable reserve-based assets can be more challenging and may require modified approaches compared to more traditional financing alternatives undertaken in other industries. Specifically, issues surrounding the degree of control requested and demanded by lenders over the borrower's operations, exploration and development activities coupled with the level of debt amortization required to protect the lenders' interest in the depletable collateral leads many distressed E&P Companies to nothing more than an orderly sale. Restructuring and/or financing the E&P Company to enable the borrower, its management and its equity holders (or some portion thereof) to remain in control poses significant financial and legal hurdles. These issues have returned to the forefront of the restructuring and insolvency professions commencing with the volatility and sharp increases in oil prices through July 2008 and the ensuing precipitous decline in hydrocarbon prices during late 2008 and throughout 2009. Not since the nineteen eighties, have so many financial and legal issues involving the priorities and rights of parties in the assets of energy companies been present.