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Permalink Reply by Dion Warr, CPL on July 6, 2012 at 7:39

LN:

I wouldn't count on "one of the major independents" (wink) to go completely belly-up in a fully liquidated bankruptcy.  Unlike another famous bankruptcy reported on in the press as "the smartest people in the room", most E&P companies actually live and breathe on production of actual product and delivery of same to the market, where it is sold for actual money (revenue), as opposed to just futures and/or derivatives.  The production stream requires extraction from actual proved reserves, which as long as the reserves are not too thin will generally carry a large independent through a reorganization should one be required.  In such an event, royalties are still paid (losing lease contracts due to nonpayment does not go well insofar as assisting and maintaining leasehold interest.

 

Although some on the corporate board would be averse to admitting it, having an Icahn involved in most cases is a good thing, provided that he is looking to preserve shareholder value (his investment) rather than use leverage against the company to force a capitulation.  In such a scenario, his positioning with the revised Board will serve as a check against uncontrolled debt and spending and refocus the company onto profit-building.  My read would be that he understands that he doesn't understand the oil business, and it serves better to have people that do understand the oil business to run the business more responsibly.

 

CHK is already divesting themselves of certain subsidiaries and non-core assets - this supports the idea that they are looking to tackle any potential shortfalls without provocations from major lenders or creditors.

 

However, should things get dire (large cash-crunches, credit disruptions, etc.) - royalties represent a contract obligation with the lessor, and must be paid, even if "slow pay" (partial payments) must be made according to any type of bankruptcy plan.  Even if the leasehold assets are "spun off" to another purchaser in a liquidation, the underlying contracts (leases) would be acquired subject to all the obligations of the contract - thus, any new operator would have to pay under the terms of the old agreement.  Arguably, if another operator took over that did not have the same marketing arrangements that you may have under CHK, you may even benefit from a more favorable sales and marketing scheme under a different operator.

 

As of now, though, I would say don't sweat this possiblility.  The Haynesville represents too important of an investment to have it just fall through the cracks without many people wanting to assist or pick up the pieces should it come to it.

 

 

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Permalink Reply by adubu on July 6, 2012 at 15:19

Dion--- very well written excellent reply

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Permalink Reply by adubu on July 7, 2012 at 5:42

seaport-- if they don't own the minerals it's non-subject to surface owners about Royalties, exception I guess would be who then is liable to clean up the mess of pad site, maintant roads, and pipeline or general liabilty of all damages. I would think acquiring company would acquire all liablities also. I don't think they could acquire just the assets without the liablities also, but possible if stock company by acquiring only the assets..maybe some of our pros or laywers could clarify this question

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Permalink Reply by Dion Warr, CPL on July 7, 2012 at 16:43

Sesport:

With respect to landowners and surface issues, surface lease contracts would also have to be honored and similarly preserved in cases where such agreements are necessary in order to develop the minerals. As far as wellsite cleanup and restorations, DNR regulates in such situations, as well as having oversight and budgeting to clean up any sites which may be neglected in a worse-case scenario.

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Permalink Reply by adubu on July 8, 2012 at 2:27

Dion-- is DNR also reponsible to fund clean up of private land in such cases? I thought DNR only took care of State or Fed land.

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Permalink Reply by Dion Warr, CPL on July 8, 2012 at 6:32

Adubu:

DNR collects taxes and fees for orphan wells and site cleanups when responsible parties cannot be found. Bonds must also be posted by operators of permitted wells which function as a surety in the event that a responsible party no longer exists at the time that a well is required to be plugged by DNR.

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Permalink Reply by adubu on July 8, 2012 at 13:50

Dion--- posting bonds is this in all state? where does money go or held? That could be very expensive for operator to post bonds on all permits. Wells that are abandon and not pluged by operator that can not be located or has filed BR in Texas I beleive the Texas RRC with taxpayers money makes sure the well is  plugged.  I know for fact that happen with old lease I had about 12 years ago in Rusk County.

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Permalink Reply by Krkyoldhag on July 10, 2012 at 0:42

So you are saying that in most cases royalty owners would be considered creditors? 

Its sure going to be a learning curve on bankruptcy ..my experience is that creditors get pennies on the dollar at best in one. 

I asked on another thread.."what about the gas still in the ground?  "  I can understand the royalties owed being treated like credit, but what about the ng they have not piped out yet?  Would that be set up as a pay as you go situation? 

Chapter 11 or Chapter 7 ...  nobody wins.  But there are times when creditors can force it.  Being six months or more out on debts is a good start. 

Who would have ever thought Placid would be be auctioned off?

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Permalink Reply by adubu on July 10, 2012 at 12:33

I would think your minerals royalty would be a separated asset owned by you 100% and outside of the operator's company not involved with BR and your royalties would continued to be paid if production continued. The operator WI would be assets of company and tied to BR. I would think the court could allow the well to be sold to another operator and then they take over but required to continue you under present lease you have just a different Lessee and new owner would be responsible to pay you according to your lease. If I am wrong some of the Pros on this site can correct me. Dion Warr-- What do you think is this correct or wrong?

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