Oil and Gas Investor Quotes Akin Gump Partners from “Mitigating Risk in a Tumultuous Energy Market” Briefing

Oil and Gas Investor has published the article “Insight: Understanding Risk, Relationships during Oil Crisis,” which features comments from several Akin Gump partners at the firm’s recent webinar “Mitigating Risk in a Tumultuous Energy Market.” The program addressed some of the challenges and opportunities for the domestic and global energy sectors in light of the oil price war and the COVID-19 pandemic.

Speaking about the importance of companies working together in order to survive, Gabriel Procaccini said, “Participants should be focused on the interrelatedness of the global upstream, midstream and downstream sectors, as the industry is more sensitive to events throughout the global value chain in this era of U.S. crude oil exports, LNG exports and the shale revolution than it has ever been before.” He advised companies to be “hyperfocused on finding practical solutions and reasonable compromises” to mitigate the risks that have emerged, adding that companies should not do anything to risk upsetting long-term relationships.

Procaccini also explained that an onslaught of midstream contract renegotiations is imminent, which will require management teams to “have a deep understanding of the classes of midstream contracts at their companies and the potential exposure under each.”

Upstream companies face similar difficulties, the article points out. The main concern there, said Michael Byrd, “is avoiding lease terminations due to having no production, maybe shutting-in, or a lack of production and paying quantity.”

Byrd said a government shut-in order, for example, “that requires all operators to cut production by [a certain percentage] and allows each operator to choose where it makes cuts to avoid issues of waste, termination and contracts, can increase the risk of a dispute.” He added that shutting in certain fields would “involve decisions that truly require input and collaboration between several departments of a company.”

Thomas McCaffrey observed that investors also need to be flexible and willing to adapt their capital structures to deal with nonperforming or distressed investments. “The response [to the present environment] varies from investor to investor in addressing credit issues in a portfolio company,” he said.

McCaffrey presented several options for investor action. They range from waived faults and rescue financing on terms significantly better than the companies could obtain elsewhere to various loan conversion structures that can be tailored to address the specific needs of the company.

Partner Steve Davis said these options reflect “the growing complexity of capital structures since the last downturn in 2015 and 2016.”

McCaffrey suggested that any company not currently experiencing financial distress “look ahead and be proactive and consider some nonfinancial aspects of their businesses,” such as filling board vacancies with candidates familiar with distressed environments, ensuring strong retention policies to keep management teams in place or even M&A activity.

Ultimately, Procaccini said, companies should remember that they may have “more exposure throughout the global value chain in their company profile than otherwise indicated,” and they must collaborate internally and externally to make it through this stormy period.