As oil slump hits other sectors, bankruptcy lawyers dig in

An expected landslide of energy-company bankruptcies will spread to other local industries, starting with commercial real estate because of the large number of vulnerable companies with downtown office space, say Texas lawyers who are preparing for a growing workload.

“The ripple or domino effect will infect retail, manufacturing, recycling of plastics and more,” said Emanuel Grillo, a partner in the financial restructuring section at Houstonbased Baker Botts. He represents a handful of oil and gas companies that have already filed for protection under Chapter 11 of the U.S. Bankruptcy Code, including Houston-based New Gulf Resources and Hercules Offshore.

The number of bank- ruptcies filed in the federal court system’s Southern District jumped 37 percent last year, reversing a twoyear slide and approaching levels not seen since the last recession. Eighteen prominent bankruptcy experts interviewed by The Texas Lawbook say they expect the number of oil and gas companies in Texas that file for bankruptcy in 2016 to double, and that those bankruptcies will

cause a domino effect that will spread to other business sectors.

“The carnage is going to be terrible and widespread unless oil prices rebound quickly,” said William Snyder, head of restructuring at Deloitte in Dallas. “... We are going to see some gigantic companies filing that no one even suspects.”

But distress in the oil patch means more business for those who specialize in bankruptcy restructuring and reorganization. Most of the large Texas law firms have added lawyers to their bankruptcy sections.

“We added three lawyers a couple weeks ago and are looking to grow our expertise,” says Bill Wallander, who leads the bankruptcy and restructuring practice at Vinson & Elkins.

Forty-eight oil and gas service companies and ex- ploration and production companies filed for bankruptcy during the past 13 months — nearly all of them upstream exploration and production companies or oil and gas service companies, according to a recent report by the law firm Haynes and Boone.

“The Chapter 11 practice was all but dead in Texas the past several years,” said Demetra Liggins, a partner in the bankruptcy section at Thompson & Knight in Houston.

Liggins said distressed companies employed the “extend and pretend” method in the past six years, meaning lenders would simply extend the terms of the debt when loans came due and could not be repaid.

“Many oil and gas companies are finally approaching the point where they can no longer extend and pretend,” Liggins said.

Last June, access to the capital markets and easy money dried up for heavily leveraged companies, and federal regulators squeezed financial institutions to be tougher on the debt for those businesses. Oil and gas prices declined further just as debt payments came due.

As mergers, acquisitions and securities offerings fell, bankruptcy filings climbed.

Winston & Strawn bankruptcy partner Lydia Protopapas in Houston calls it “just the beginning.”

In the past three weeks, two major corporations — Houston-based Linn Energy and Oklahomabased Chesapeake Energy — said they have hired the restructuring gurus at Kirkland & Ellis, a Chicago law firm with offices in Houston. Kirkland already represents Dallas-based Energy Future Holdings, Houston-based Sabine Oil & Gas, Oklahoma-based SandRidge Energy and

Samson Resources in their bankruptcy efforts.

Protopapas and others see a pattern.

“Smaller and weaker oil and gas service companies and E&P companies filed for bankruptcy first,” Wallander said. “Sometimes, the failure of weaker companies can impact larger oil and gas companies that were considered healthy.”

Legal experts see a potential land mine that could hurt midstream companies, which have been presumed to be almost immune from bankruptcy because they have long-term, lucrative contracts to transport dry gas, propane and crude oil.

Lawyers representing Sabine Oil & Gas, which filed for Chapter 11 protection last July in New York, asked the federal bankruptcy judge overseeing the case to reject expensive gathering and processing agreements on certain properties that Sabine signed with midstream pipeline companies during more prosperous financial times.

These contracts have previously been consid-

ered untouchable, even in bankruptcy court, because they were viewed as “covenants running with the land” under Texas law because they actually touched the property, which meant the agreements attached to them could not be rejected in bankruptcy court.

But a judge two weeks ago said she was “inclined” to grant Sabine’s motion to reject the contracts the oil and gas company has with its midstream partners, which could possibly save the company tens of millions of dollars annually.

Such a ruling would benefit exploration and production companies, but it could force some midstream companies into bankruptcy, lawyers in the Sabine litigation said.

Bankruptcy lawyers described it as the “undertow effect.”

“Once the dominoes start falling,” Grillo said, “watch out.”

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