Oilfield Services and E and P Companies – A Causal Relationship

00-37-51-982_640As a result of declining oil prices, a number of American oil and gas operators have recently sought restructuring opportunities, with some even seeking Chapter 11 bankruptcy protections. This trend has had a noticeable impact on the entire upstream sector, which includes both exploration and production (E&P) companies and oilfield service (OFS) providers.

Strategies

To guard against future fluctuation in commodities prices, E&P companies use hedging strategies such as futures or option contracts to ensure a steady stream of income. For example, by securing a three-year futures contract guaranteeing a sale price of $80 per barrel, a company could hope to survive through a two-year period in which oil prices drop to $50 per barrel.

Impact on OFS Sector

Although these strategies can help E&P companies navigate periods of financial distress, they can have a negative impact on the OFS sector. Measures taken by an E&P firm to decrease its capital budget, such as ceasing all unnecessary new well production or ending production in particularly expensive sectors, reduce the demand for oilfield services and can have a lasting traumatic impact on OFS companies. In light of recent industry trends, experts predict as much as a 20 percent decline in the price of offerings such as fracking services and drilling rig leases. For this reason, they also predict that OFS companies will experience a wider scope of liquidity crises long before their E&P counterparts.

A Brief Overview of the ABC Sale Process

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A type of insolvency proceeding similar to a Chapter 7 bankruptcy, an assignment for the benefit of creditors (ABC) allows buyers to purchase a leveraged company’s assets as a going concern. Known as turnkey sales, ABC sales offer an alternative to distressed sales in that they are shorter and less expensive than transactions under Section 363 of the Bankruptcy Code, but provide protections not afforded to buyers in out-of-court sales.

An ABC sale allows a distressed company, known as the assignor, to transfer legal control of its assets to a third party, or assignee. Acting as a trustee, the assignee carries out the liquidation of these assets and uses the proceeds to pay off a portion of the assignor’s debts.

Before an ABC sale begins, the assignee and distressed entity identify a buyer, who then negotiates with the assignee to draft a purchase agreement. Since an ABC does not affect secured creditor rights, the buyer also negotiates with the troubled firm’s secured creditors. In some cases, the assignee may seek an appraisal of the assets before finalizing the sale. When purchasing assets in a turnkey sale, buyers do not receive representations or warranties. In most cases, the assignee only guarantees that he or she legally possesses the title for the transferred assets.