Distressed Business Environments: Contract Revisions and Workout and Bankruptcy Options

1. Distressed Business Environments: Contract Revisions and Workout and Bankruptcy Options Presented by: Patrick L. Hughes Charles A. Beckham, Jr.

2. Liquidity Problems for the Oilfield Increasing Liquidity Constraints in the Oilfield Services • PE Principal: “There are 79 private equity-backed pressure pumping companies, and you only need 10.” • Big shake-out in service industry • Stacking equipment -- fast • E&P companies asking for large (20-30%) discounts from suppliers to protect capex spending • RIFs to reduce operating costs. • Reduced revenues to service companies could be insufficient to cover interest and capex and to maintain a trained workforce

3. Liquidity Problems for the Oilfield Marginal fields; high cost fields; storage constraints; lackluster demand Increasing Liquidity Constraints for Oilfield Companies • Could trigger covenant and/or payment defaults under ABLs • Lots of consolidation ahead • Liquidation of weaker players • High priced debt SO WHAT DO WE DO NOW?

4. First Steps-Better Check Your Liens and Covenants Mistakes Matter – Check Lien Perfection (January 21, 2015, 11:08 AM ET) – The Second Circuit invalidated JPMorgan Chase & Co.’s lien on a $1.5 billion loan to General Motors Corp.’s bankrupt predecessor, enforcing mistaken paperwork filed by its law firm that the bank failed to notice. The appeals court’s ruling followed an October directive from the Delaware Supreme Court that a secured party’s filing of a so-called UCC-3 form sufficed to terminate the bank’s security interest, no matter any subjective intent to do otherwise. “It is clear that although JPMorgan never intended to terminate the [lien], it authorized the filing of a UCC-3 termination statement that had that effect,” the three-judge panel said. “Nothing more is needed.” REVIEW LIEN AND COLLATERAL PERFECTION EARLY

5. First Steps-Better Check Your Liens and Covenants Do you have what you think you have? 2015-- Midstream Company has field dedications with Upstream Company. Upstream did a corporate restructure [non bankruptcy]. Assets and operations separated. Assets stay in entity that contracted with Midstream. Review your contracts, but also your counterparties early.

6. Another First Step: Verify D&O Coverage • D&O Coverage in Place? • I mean Really? • What is it rated? • What does it cover? • What does it not cover? • Surely outside counsel will take a promise of future answer on coverage to represent now? • What can I do about it if the insurer does not answer fast? • Why should I care? • What do you mean the indemnity rights are just prepetition claims? • What do you mean the D&O is personally coming out of pocket? • What do you mean my personal and company email accounts can be accessed?

7. Next Step: Review Opportunities in Distressed Acquisitions • Acquisition and Investment Opportunities: • Buy market share via “M&A” or “363” • Companies may need additional equity investment or mezzanine/2nd lien debt to address borrowing base limitations or pay downs-can you “loan to own”? • Achieve or maintain economies of scale for operations and purchasing power with suppliers

8. Opportunities in Distressed Acquisitions • Typical Situation • Company (operator) faced with borrowing base adjustment or pressure from secured lender • Lower revenues due to declining oil, gas and NGL prices and resulting reduced activity • Inability to procure new business or maintain existing margins • Unprofitable locations/operations • Capital constraints discourage new drilling? • How do you fix it? Why use a bankruptcy?

9. Bankruptcy Sale and Auction Process to Get Certainty • Acquisitions in Chapter 11 • Seller is in distress • Secured lender may require it • Purchaser may require it • Minimize challenges to the sale • Bid procedures and stalking horse protections • 363 Sale is free and clear • Easier to assign contracts • Resolve Unprofitable location/division issues

10. What Are the Benefits of Chapter 11 Acquisitions? Court approved bid procedure Bid protections Reimbursement and breakup fees Possibility of low purchase price Stalking horse may be DIP Lender Forum for resolving contested claims Assets are free and clear of liens, claims and interests Resolution of title and environmental Issues Resolve consent Issues Cherry pick the good assets No fraudulent transfer risk Limited successor liability

11. What Are the Downsides to Chapter 11? • Reputational risk • Loss of control • Inability to get financing? • Competing bids to the “chosen one” • Expense [?]

12. Bankruptcy Sale – Assignment of Contracts • Bankruptcy Allows Contract Rejection/Assignment • Leases and contracts may be assumed/assigned or rejected • Assignment can be implemented despite consent rights of counter-party to contract • Assignment requires curing past defaults and providing adequate assurance of future financial performance • Who pays cure (buyer or seller) is a negotiatedpoint • But some exceptions

13. Concerns If Not Done In Bankruptcy? • Fraudulent Transfer Risk • Was the deal “too good”? • Was the deal “in good faith”? [subjective and objective] • Successor Liability Risk? • Fiduciary Liability Issues?

14. How to Protect Against a Fraudulent Transfer Risk in a Nonbankruptcy Process? • Diligence seller and pro forma’s/book • Diligence most recent value representations • To banks • Owner financial statements • Get a current valuation • Build your file on front end • Owner statements of value • Recitals in the PSA

15. What Happens in a Bankruptcy Case? • Financing Orders on the Front End • Court Permissions Needed • 363 v. Plan Process • Timetable • Committees • US Trustee • Retention of Professionals Issues • Rewrite Interest Rates and Debt Terms • Overcome the “Holdouts” • Resolve Exposure to Mass Tort Claims [Silica, Asbestos, Environmental] • Venue Issues • Derivatives/Forward Contracts

16. Renegotiating your contracts – Changing the “deal” • “We had a deal, but I need you to renegotiate . . . or else.” • Does the “new deal” have to be in writing?

17. Get it in writing - Statute of Frauds An agreement subject to the statute of frauds is not enforceable unless it or a “memorandum” of it, is: • (1) in writing; and • (2) signed by authorized person TEX. BUS. & COM. CODE ANN. § 26.01(a) (West 2009)

18. Statute of Frauds Applies to: • Contract for the sale of real estate; • Lease of real estate for a term longer than one year; • Agreement not to be performed within one year; • Agreement to pay commission for sale or purchase of mineral interests; • Contract for sale of goods for the price of $500 or more; • Suretyship and various other situations. TEX. BUS. & COM. CODE ANN. §§ 2.201 & 26.01(a)

19. Modifications to a Contract • “Generally, any modification to an agreement subject to the statute of frauds must also be in writing.” • “If the modification to the agreement is not a material one, then an oral modification may be enforceable.” • “[I]n considering whether there has been an oral modification . . . the parties’ behavior may be considered as evidence of the agreement.” Petrohawk Properties, L.P. v. Jones, No. 06-14-00003-CV, 2015 WL 170225 (Tex. App.—Texarkana Jan. 14, 2015, no pet. h.) (extension of time for filing review petition).

20. Petrohawk Properties, LP v. Jones • Agreement to lease mineral interests during Haynesville Shale frenzy in 2008. • 8500 net acres, $23,500/acre lease bonus, potentially ~$200 million bonus. • $10 million escrow deposit, liquidated damages. • Title due diligence period. • Agreement provided for Aug. 15, 2008 closing date.

21. Petrohawk Properties, LP v. Jones • Title work progressed slowly. • Parties agreed to postpone closing to Aug. 27, 2008. • On Aug. 27, closed on 2700 acres, Petrohawk paying $51 million, including the escrow. • Postponed second closing to Oct. 9, and planned a third closing on Nov. 6. • Financial crisis during the fall of 2008. • Oct. 7, Petrohawk notified lessors, not leasing any more.

22. Petrohawk Properties, LP v. Jones • Petrohawk argued that Plaintiffs had 30 days to clear title on any additional acreage after the Aug. 29 first closing and, having not done so, Petrohawk had no further obligations. • Lessors sued. • Judgment for $12.3 million damages, plus $4.2 million fees.

23. Petrohawk Properties, LP v. Jones • “Under certain circumstances, an oral agreement to extend the time of performance of a contract required to be in writing is enforceable, if the oral agreement is made before the written contract expires.” • “[S]uch an extension of time for performance may be implied as well as express.” • “[A]n oral extension of time to perform is enforceable only if it does not materially alter the underlying written contract.”

24. Petrohawk Properties, LP v. Jones • “[T]he oral modification to conduct multiple closings neither changed the obligations and rights of the parties under the Agreement nor substantially altered the Agreement itself.” • “[M]odification was not material, the modification was not required to be in writing.”

25. Other potential exceptions to the Statute of Frauds • Partial performance/virtual fraud • Full performance by plaintiff • Promissory estoppel/unsigned writing • Main purpose/suretyship • Fiduciary duty/constructive fraud

26. Contract Litigation over Intent, Ambiguity, Surrounding Circumstances • Often expensive – see Petrohawkcase. • Under Texas law, a plaintiff who prevails on a breach of contract claim can be granted attorneys’ fees ($4.2M in fees to plaintiff in Petrohawk). • Oral evidence often disputed. • Multitude of contract construction canons can make issues complex.

27. Avoiding Contract Litigation • Recognize that there are exceptions to the statute of frauds writing requirements. • When modifying the deal, best to formalize the agreement, and make sure there is an agreement. • A commonly changed provision – time of performance, even by implication. • Invest in transactional attorney time, to possibly avoid litigation attorney time.