Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on January 16, 2018 at 3:58

Jay, I'm unsure that "death" is a forgone conclusion.  After watching the "restructuring" of Goodrich, and others, it appears that Chapter 11 is often a means to write off debt and go back to business as usual with an improved balance sheet and other cost reductions.  I suspect that you may be right about the volume commitment to Azure but that contract could also be re-negotiated through a bankruptcy.  Goodrich touted its lower Haynesville gathering and treating costs when they emerged from bankruptcy.

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Permalink Reply by Skip Peel - Mineral Consultant on January 16, 2018 at 4:47

I've wondered what a liquidation might look like since EXCO only owns a half interest in their Haynesville assets.

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Permalink Reply by kittycatmama on January 16, 2018 at 5:05

So how will that affect those who are leased with Exco? Will they continue to get royalty pmts.?

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Permalink Reply by M B Gilster on January 16, 2018 at 5:10

As a leased RO that had 4 new CUL’s come on line last month w/ Exco & a DO received last week for an additional 4, I’m looking forward to Jay, Skip or other SME’s  replies.

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Permalink Reply by Skip Peel - Mineral Consultant on January 16, 2018 at 5:15

Too soon to know for sure however other Chapter 11 bankruptcies by operating companies in the recent past have requested, and received permission from the bankruptcy court, to continue paying royalties.  The leases are the underlying value of Exco, and other operating companies, and to stop paying royalties would place them in default of their lease agreements.  In other words, if they stop paying royalties, they lose their lease rights. Then they would have to shut in their wells.  No one wants to go down that road.

Just hope that Tellurian doesn't buy Exco's Haynesville reserves.

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Permalink Reply by Skip Peel - Mineral Consultant on January 16, 2018 at 8:31

They would make a good bolt on for either.  And preferable for multiple reasons compared to Chesapeake.

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Permalink Reply by kittycatmama on January 16, 2018 at 13:13

Jay you don't think GEPH would make a run for Exco?

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Permalink Reply by Dion Warr, CPL on February 5, 2018 at 20:22

Skip:

Wait, stop... in most situations, the obligation of payment of royalty to the lessor is suspended by the bankruptcy filing, and the lessor becomes an unsecured creditor.  Under a court-approved repayment plan, the debtor could make partial payments against obligations due under the lease until the bankruptcy is discharged or dismissed and not be held in breach.

You actually point to a prime reason that rights and obligations under leases are held in this manner through the bankruptcy - the oil and gas leases and operations thereon and production therefrom are usually a prime source of revenue from which the obligations of debtor are repaid.  Thus, it is usually part of the original terms of the petition and bankruptcy plan that budgeting for continuing such operations are made and permitted by the court.  By having freedom to continuing to operate, the debtor has the best chance to pay off and/or restructure its debts and emerge from bankruptcy, rather than leave a bunch of open wells with no operator in a liquidation.  Everyone would lose.

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Permalink Reply by Skip Peel - Mineral Consultant on February 6, 2018 at 2:52

Hmmm, if memory serves, my O&G attorney considers anything other than a full payment of royalty insufficient and a breach of the lease agreement potentially leading to termination of the lease.  The GHS members who have been through bankruptcies with their operators have never reported partial payments but perhaps they just didn't notice.

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Permalink Reply by Dion Warr, CPL on February 6, 2018 at 5:01

Skip:

Royalty is generally treated as a covenant and not as a condition; the lessor owes the royalty, but timely payment of royalties is not fatal to the lease.  It may leave the lessor subject to penalties and trigger breach provisions, but not fatal.  Unlike, it should be noted, a rental - if one fails to pay a rental, the lease terminates.

In any event, BK suspends the usual enforcement of such terms and subjects all contracts to the BK court.  Without such protections in bankruptcy, there would be no leverage available to the debtor when declaring bankruptcy or in applying for reorganization - the secured creditors would just pick up all their respective pieces and go home, to the extent that they can, leaving others less able to deal with the consequences to deal with the maw which remains.

Normally, royalty payments during BK can either (1) continue as usual, (2) be suspended until the terms of the BK can be worked out over some period and then resume, or choice (3) - payment plan as covered above until the company can (hopefully) successfully reemerge.  The first generally occurs during a "preplanned" bankruptcy - the larger secured creditors usually end up with an equity position in the reorganized company and/or assets, the smaller ones being paid or settled with, and then everyone goes on as usual - no hiccups in normal operations, including royalty payments.  Options 2 and 3 occur in cash- and/or asset-strapped bankruptcies - too many operations and obligations and not enough pledged assets and revenue with which to pay everyone.

Insofar as the lessor seeking termination of lease under these circumstances - rest assured that the leases will be declared in a list of assets and contracts (along with the wells and appurtenances), and thus subject to the jurisdiction of the bankruptcy court.  No court or BK trustee is ever, EVER, going to look upon a release or lease dissolution (especially on a producing property) as a preferred remedy.

Permalink Reply by CG on January 16, 2018 at 6:05

Skip, why hope Tellurian doesn't buy them?

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Permalink Reply by Skip Peel - Mineral Consultant on January 16, 2018 at 6:21

Because Tellurian has already acquired the former Samson Contour Haynesville Units and has been touting their business plan to have the lowest cost per mcf by way of a vertically integrated business plan.  They want to own as large a percentage as possible of the natural gas they use to export LNG.  They are projecting a cost of around $2.25/mcf.  With natural gas in the $3 range and some near future expectations of a 10 to 15% price increase, there is an obvious disconnect.  Will mineral lessors in those Tellurian operated units, and any other Haynesvville units they may acquire in the future, get paid a less than market rate price for their natural gas?  Either Tellurian gets its $2.25 gas and they don't, or mineral lessors get a market price and Tellurian's cost is significantly more than $2.25.  Since Tellurian's LNG facility will not be operational until 2023. the question of how they will have $2.25 gas is a puzzle.  Personally I would not want the exposure to a company producing my natural gas reserves that has a strong incentive to pay me the lowest price they can get away with.

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