Lessons from the ATP Bankruptcy | Russell T. Rudy Energy LLC
“Rigzone” reports that by 2013 the Deepwater Horizon disaster, the subsequent drilling moratorium, and expensive long lead time projects, had forced ATP Oil & Gas into bankruptcy. Charles Kelley and Sean Scott, the attorneys with Mayer Brown LLP who guided ATP through Chapter 11, relate valuable lessons for other oil and gas companies.
Leverage has a point of no return-Excessive leverage can become a Ponzi scheme in which you are constantly borrowing money to pay off older loans which are now due. This diverts management’s focus and funds from operating the company to servicing debt. When finances degenerate to the point that future production is pledged as collateral for loans, the subsequent revenue goes to creditors, not to the company, and a death spiral begins.
Counter-party rights vary by jurisdiction-Some of ATP’s creditors had taken net profits or overriding royalty interests in properties in order to secure their potential claims. They erroneously assumed that these interests represented real property or “an absolute conveyance that the courts would respect” and consequently be safe from restructuring. While this is the case in some states, it may not be the same in a neighboring one.
Realistic optimism is critical-You have to be an optimist to be successful in the oil and gas business. However, optimism must be tempered with realism. Risk is an intrinsic component of the energy industry. Success is based on effectively managing that risk and not merely hoping for the best. When problems emerge, it is much easier to deal with them in their infancy than with a full blown crisis. Some operators seem to have taken this to heart and are seeking financial and legal advice before their situations become dire.
Attorney Charles Kelley concludes on a positive note; “…It is my impression that we are seeing a level of sophistication in dealing with these things a bit earlier that gives me optimism that maybe they’re changing their ways.”
To read the article in its entirety, please go to http://www.rigzone.com/news/article_pf.asp?a_id=139371 .
