Amidst the current downturn in oil prices, many expect and hope for, an increase in merger and acquisition (M&A) activity in the coming months.1 Whereas past downturns created an opportunity for major acquisitions, such as Exxon’s merger with Mobil and BP’s purchase of Amoco in the late 1990s, this time around, distressed asset transactions involving the growing number of heavily indebted shale producers and oil field service companies appear more likely.2 As many companies slip into bankruptcy in 2016,3 Section 363 sales present one avenue for deal flow. Yet, outside of the courtroom, non-363 sales, while carrying certain risks, present opportunities for buyers seeking to capture value by acquiring assets at reduced prices.
The most notable advantage associated with Section 363 sales is the ability to acquire assets free and clear of liens and most liabilities. Nevertheless, certain drawbacks do exist, including the length of the auction process, which can last up to 90 days, and the negative publicity associated with bankruptcies, which can potentially further harm asset value. In addition, because the goal of a Section 363 sale is to obtain the highest and best price, a buyer may ultimately pay more than in a private transaction.4
Unrestricted by the bankruptcy process, non-363 sales can move quickly, are afforded greater confidentiality and may result in a lower purchase price. However, despite these advantages, major risks exist. Specifically, to preserve asset value, distressed deals look to close as quickly as possible. This urgency consequently limits the amount of due diligence that can be conducted, creating a risk that impacts a buyer’s ability to effectively evaluate the assets, the purchase price and potential future liability. In anondistressed sale, parties can include representations and warranties to protect against an expedited diligence process. However, in a distressed sale, the representations and warranties of a company teetering on the edge of bankruptcy may inspire little confidence. To protect against this uncertainty, buyers may obtain third-party guarantees from a parent or shareholders, or, if feasible, M&A insurance to mitigate the risks.5 Finally, given that the counterparty may still face bankruptcy after the sale, particular attention will need to be paid to drafting a process to help ameliorate potential risks related to fraudulent conveyances.
According to a recentDeloitte report, 175 production companies, or nearly 35 percent of publicly traded exploration and production (E&P) companies worldwide, are considered “high risk” based on their combination of high-leverage and low-debt service coverage ratios.6 An additional 160 companies, which are less leveraged, but face serious cashflow problems, also face an uncertain future.7 Given the situation of most companies, as the markets continue to languish, many investors will look to acquire productive assets at low prices. While non-363 sales do present challenges, the ability to quickly move on attractive assets at low prices may prove appealing to potential acquisitive parties.