Law firms know the drill on oil
Houston area endures another cycle on crude prices, ‘but we are in better shape than we were in the ’80s’
THE decades may have passed, but the memory of the oil and gas collapse of the 1980s and the decimation to Houston’s economy that followed is still raw for those who lived through the fallout.
“I remember I would not plan to go to a restaurant without calling first to make sure they were still in business. Places were closing that fast,” recalls Jacqueline Weaver, a University of Houston law professor who specializes in the legal side of the oil and gas industry.
Bankruptcies, breach of contract lawsuits and foreclosures ruled the day as the oil industry collapse spilled into the legal arena.
“Litigation always follows any abrupt change in economic circumstance,” Weaver says.
Law and oil have always had a symbiotic relationship in both good times and bad. And now that U.S. oil is trading for roughly half of what it did a year ago, the city’s law firms are keeping a wary eye on their oil and gas clients, wondering what the current downturn will mean to the legal community. Could history repeat itself ? “We’re starting to see some reorganizations, some bankruptcy filings already. That creates a ripple effect. These companies have contracts with other companies,” explains William Wood, head of energy and infrastructure U.S. for the Norton Rose Fulbright law firm in Houston. “As contracts are no longer able to be honored, then you will have litigation on those contracts.”
“It’s hard to predict, but typically in down times people point fingers and say, ‘It’s not my fault,’ ” adds Mark Kelly, chairman of Vinson & Elkins, which ranks as the city’s largest law firm in this year’s Chronicle survey. The firm is followed on the list by Andrews Kurth and Norton Rose Fulbright.
Kelly specializes in mergers and acquisitions, initial public offerings and public financing, and clients include oil field service companies.
“We’re doing some debt restructuring,” he says. “The level of that may change.”
The drop in the price of oil causes a drop in drilling, which in turn forces less production. Both mean less demand for oil field services as well as oil field supplies and equipment.
With the duration of the downturn in question, and legal action typically a lagging indicator, any real impact on law firms and the work they do remains in question.
If prices stay low for an extended period, Weaver says, it could mean more legal filings. That could include suing for nonpayment of royalties or other services. In lean times, contracts are often pored over looking for outs, she says.
Kelly says his firm has not yet seen an uptick in bankruptcy filings within the oil and gas industry.
“Bankruptcies are expensive,” he explains, and often viewed as a last resort.
Instead, lawyers in his firm
“It’s hard to predict, but typically in down times people point fingers and say, ‘It’s not my fault.’”
Mark Kelly, Vinson & Elkins
are busy helping companies restructure their debt, he says. That’s not unlike a homeowner who tries to refinance a home rather than lose it.
“Companies are being very careful on where to deploy their capital. We’re starting to see the activity heating up in mergers and acquisitions. Expect to really see that in the third quarter,” Wood predicts.
Despite the downturn in prices, many companies still have deep pockets. Mergers and acquisition law will remain robust in the short term as the bigger companies gobble up undervalued companies or distressed assets.
“If companies are distressed, they may look for a lifeline,” Kelly says.
Oil and gas is a boom or bust cycle. Anyone who wades into the industry, including the legal community, must be prepared.
“This is my fourth cycle,” Kelly says. “No one knows how long it will last, but we are in better shape than we were in the ’80s.”
“I walked into a Houston energy economy in 1984. It was a whole different ball game,” Wood agrees. He says Houston as an economic powerhouse has matured and learned that it cannot rely only on oil and gas.
Still, lawyers have flocked to the Houston over the past decade as the industry was booming. At least 12 of the nation’s largest firms have opened branches in Houston, bringing scores of lawyers with them or hiring away from existing firms with sweet deals and lavish compensation packages.
“Energy is seen as a great opportunity for the legal community,” Kelly says.
The already intense competition for oil and gas clients may become more so as the price of oil drops and clients become more cost conscious.
The key for law firms is to be nimble and responsive to the changing market. Being the biggest is no longer a slamdunk in attracting clients, so it remains even more important to understand the complexities of the industry, Kelly says. He adds, though, that having a “deep bench” gives his firm flexibility.
Representing the oil and gas industry is a complicated specialty, says Wood, and there isn’t a huge supply of lawyers with the necessary skills. Some law firms will build up resources for boom periods and trim during a bust.
“Law firms are just like any other business,” Wood says of the shifting Houston legal landscape. “There are shakeouts. Some business models don’t work. There will be winners, and there will be some firms that will be consolidated, and some will abandon the market.”
He adds with a chuckle: “We’re not going anywhere.”
“Companies are being very careful on where to deploy their capital. We’re starting to see the activity heating up in mergers and acquisitions. Expect to really see that in the third quarter.”
William Wood, Norton Rose Fulbright