HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 haynesboone.com TABLE OF CONTENTS 1 Introduction 2 Fall 2018 Borrowing Base Redeterminations Survey 4 Oil Patch Bankruptcy Monitor 6 Oilfield Services Bankruptcy Tracker 8 Midstream Report 10 Energy M&A Case Study 11 Commodities Transaction Case Study 12 Energy Law Updates 14 Much Ado about Lending: A Backwards Look at the OCC’s 2016 Leverage Test 16 Class Action Royalty Litigation in the Shale Plays 18 Haynes and Boone Energy News and Events 19 Is Fracking the Next Financial Crisis? 20 Key Contacts 22 Offices 1 INTRODUCTION The Haynes and Boone Energy Roundup report covers topics of current interest to the energy industry. Our inaugural Fall 2018 issue highlights the sustained optimism of the United States oil and gas industry, which is being driven by improved oil prices over the last three years. This optimism manifests itself in the results of our Fall 2018 Borrowing Base Redeterminations Survey, which predicts increases in credit availability to producers, and the findings of our bankruptcy monitor reports, which show the sun setting on a three year era of oil and gas bankruptcies. Our financial leverage test studies reveal that the number of E&P companies expected to pass the OCC’s leverage test is growing year over year. We hope you find the articles in this edition of the Haynes and Boone Energy Roundup interesting and informative. 2 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 Since April 2015, Haynes and Boone has conducted eight borrowing base redetermination surveys, including one most recently in September 2018. The primary objective was to get a forward-looking and clear idea of what lenders, borrowers (oil and gas producers) and others are experiencing regarding borrowing base redeterminations in light of the price uncertainty in the commodity markets. The following is a summary of some of the September 2018 survey results and an analysis of the responses. Q: WHAT PERCENTAGE DO YOU EXPECT BORROWING BASES TO CHANGE IN FALL 2018 AS COMPARED TO SPRING 2018? FALL 2018 BORROWING BASE REDETERMINATIONS SURVEY Download the full Borrowing Base Redeterminations Survey. NO. OF RESPONDENTS 0 10 20 30 40 50 60 Overall responses Lender responses Borrower responses ≥40% ≥30% 20% 10% No change 10% 20% ≥30% ≥40% Decrease Increase More than 78 percent of the respondents expect borrowers to see a borrowing base increase in fall 2018. 3 KEY TAKEAWAYS Respondents have a positive outlook about fall 2018 borrowing bases — more than 78 percent expect borrowing bases to increase, with 36 percent expecting 20 percent or greater increases. Strong oil prices are leading borrowers to roll forward their hedging. The respondents estimate that producers have a significant percentage — 50 to 60 percent — of their 2019 production hedged. Fall 2018 expectations regarding capital sources were almost identical to our spring 2018 survey results. Producers continue to favor cash flow from operations, bank debt and private equity as their primary sources of capital. Oil and gas producers’ biggest concern in 2019, by a significant margin, is midstream capacity. NO. OF RESPONDENTS 0 5 10 15 20 25 30 35 40 10% 20% 30% 40% 50% 60% 70% 80% 90% Overall responses Lender responses Borrower responses Other Trade war tensions Midstream capacity constraints Rising costs of oilfield services Commodity price volatility Cost of capital 42% 19% 17% 9% 7% 6% Q: ON AVERAGE, WHAT PERCENTAGE OF ANTICIPATED FUTURE PRODUCTION HAVE RESERVE-BASED CREDIT FACILITY BORROWERS HEDGED FOR THE NEXT 12 MONTHS? Q: WHAT IS THE GREATEST CHALLENGE THAT OIL AND GAS PRODUCERS WILL FACE IN 2019? Two-thirds of respondents indicate that borrowers have locked in prices for the majority of their 2019 production. 4 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 OIL PATCH BANKRUPTCY MONITOR 0 20 40 60 80 100 120 140 160 2015 2016 2017 2018 NUMBER OF FILINGS 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 Haynes and Boone has tracked 160 North American oil and gas producers that have filed for bankruptcy since the beginning of 2015. These bankruptcies, including Chapter 7, Chapter 11, Chapter 15, and Canadian cases, involve approximately $92.9 billion in cumulative secured and unsecured debt. One hundred forty two of the cases were filed in the United States. As of August 31, 2018, 22 producers have filed bankruptcy in 2018, representing approximately $9.0 billion in cumulative secured and unsecured debt. E&P bankruptcy filings decreased significantly in 2017 and 2018 compared with 2016. During 2016 alone, 70 E&P companies filed bankruptcy, while only 46 companies filed in 2017 and 2018 combined. Despite fewer filings, the debt administered in recent E&P filings is substantial. The total amount of debt administered in E&P filings during the first three quarters of 2018 surpasses the total amount of debt administered by filings during the entirety of 2017. 2015-2018 CUMULATIVE NORTH AMERICAN E&P BANKRUPTCY FILINGS Download the full Oil Patch Bankruptcy Monitor. 5 2015-2018 E&P BANKRUPTCY FILINGS BY LOCATION 2015-2018 E&P BANKRUPTCY FILINGS BY EXIT STRATEGY 2015-2018 E&P SECURED AND UNSECURED CUMULATIVE DEBT 2015-2018 E&P SECURED AND UNSECURED DEBT BY FILING LOCATION TEXAS NEW OKLAHOMA MEXICO ARIZONA UTAH CALIFORNIA COLORADO 71 1 10 2 1 1 5 3 2 LOUISIANA 7 ALABAMA 1 KENTUCKY 2 NEW YORK 6 MASSACHUSETTS 1 PENNSYLVANIA 1 DELAWARE 25 VIRGINIA 1 WEST VIRGINIA 1 ALASKA MONTANA 1 MINNESOTA 18 CANADA TEXAS $46,566,970,292 NEW YORK $18,591,566,079 DELAWARE $22,562,517,598 U.S. Filings Only (As of August 31, 2018) Alabama $212,726 Alaska $217,158,133 Arizona $3,699,213 California $71,772,722 Canada $1,710,380,228 Colorado $433,336,133 Kentucky $14,881,247 Louisiana $527,475,079 Massachusetts $3,578,276 Minnesota $1,233,733 Montana $83,726,167 New Mexico $1,286,649 Oklahoma $169,158,462 Pennsylvania $1,999,391,276 Utah $274,640,449 Virginia $1,250,928,395 West Virginia $40,865,611 DEBT-TO-EQUITY 39 363 SALES 43 OTHER 23 CHAPTER 7 21 CHAPTER 15 4 REORGANIZATION 12 DEBT-TO-EQUITY $62,973,408,029 CHAPTER 15 $8,624,500,000 363 SALES $11,778,557,552 REORGANIZATION $3,871,394,503 OTHER $3,509,389,069 CHAPTER 7 $1,427,407,457 6 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 OILFIELD SERVICES BANKRUPTCY TRACKER Download the full Oilfield Services Bankruptcy Tracker. As a service to energy industry participants, the lawyers of the Oilfield Services and Restructuring Practices at Haynes and Boone have been tracking and reporting industry developments in oilfield service restructurings. Our research includes details on 172 bankruptcies filed since the beginning of 2015, including secured and unsecured debt totals for each case. The total amount of aggregate debt administered in oilfield services bankruptcy cases from January 2015 through August 2018 is approximately $56.4 billion and the average debt of these cases exceeds $320 million. Some of the largest reported bankruptcy cases involve total debt of approximately $8 billion (Seadrill Limited), $5.3 billion (Odebrecht), $3.7 billion (Ocean Rig), $3.4 billion (CGG Holding), $3 billion (Pacific Drilling), $2.8 billion (Vantage), $2.5 billion (Paragon Offshore), $2.3 billion (Tidewater), and $2.1 billion (Tervita). 0 20 40 60 80 100 120 140 160 180 200 2015 2016 2017 2018 NUMBER OF FILINGS 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 2015-2018 CUMULATIVE NORTH AMERICAN OILFIELD SERVICES BANKRUPTCY FILINGS $0 $10 $20 $30 $40 $50 $60 BILLIONS Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2015 2016 2017 2018 Unsecured Secured Aggregate TEXAS NEW OKLAHOMA MEXICO ARIZONA COLORADO 88 5 UTAH 2 WYOMING 2 NEBRASKA 1 KANSAS 2 2 4 2 LOUISIANA 18 GEORGIA 1 NEW YORK 10 MICHIGAN 1 DELAWARE 16 PENNSYLVANIA 8 1 NORTH DAKOTA 7 CANADA OHIO 2 TEXAS $18,133,817,419 NEW YORK $21,632,682,913 DELAWARE $15,815,668,068 7 2015-2018 CUMULATIVE NORTH AMERICAN OILFIELD SERVICES UNSECURED DEBT, SECURED DEBT, AND AGGREGATE DEBT 2015-2018 NORTH AMERICAN OILFIELD SERVICES BANKRUPTCY FILINGS BY LOCATION 2015-2018 NORTH AMERICAN OILFIELD SERVICES AGGREGATE DEBT BY FILING LOCATION Arizona $42,904,934 Canada $110,883,943 Colorado $70,147,994 Georgia $439,177 Kansas $7,817,316 Louisiana $458,461,502 Michigan $2,293,471 Nebraska $928,751 New Mexico $18,035,428 North Dakota $1,574,488 Ohio $23,880,019 Oklahoma $80,727,506 Pennsylvania $66,702,704 Utah $1,791,753 Wyoming $24,297,366 (As of August 31, 2018) 8 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 As a companion to our analysis of E&P and oilfield service bankruptcy filings, Haynes and Boone has reviewed and compiled this Midstream Report. For purposes of the Haynes and Boone Midstream Report, a “midstream company” is a company involved in the gathering, transporting, processing, or storing of oil or natural gas, as applicable. The Midstream Report includes subsidiaries of integrated exploration and production companies that are already included in the Haynes and Boone Oil Patch Bankruptcy Monitor and excludes companies that engage primarily in wholesale distribution. As demonstrated by the Midstream Report, the midstream sector has not suffered the same level of distress experienced by E&P or oilfield service companies. As of August 31, 2018, 24 midstream companies have filed Chapter 11 bankruptcy in the United States since 2015. These bankruptcies involved approximately $20.4 billion in cumulative secured and unsecured debt (including debt of related affiliates). MIDSTREAM REPORT As of August 31, 2018 24 FILED CHAPTER 11 BANKRUPTCY IN THE UNITED STATES SINCE 2015. Approximately $20.4 billion INVOLVED IN CUMULATIVE SECURED AND UNSECURED DEBT. midstream companies Download the full Midstream Report. TEXAS $9,588,863,140 NEW YORK $5,856,458,587 VIRGIN ISLANDS $1,985,322,904 DELAWARE $2,845,009,844 BILLIONS Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2015 2016 2017 2018 $0 $5 $10 $15 $20 $25 Unsecured Secured Aggregate TEXAS 10 1 TENNESSEE 1 VIRGIN ISLANDS 1 NEW YORK 3 DELAWARE 5 ALASKA 1 MINNESOTA OHIO 2 9 2015-2018 CUMULATIVE MIDSTREAM UNSECURED DEBT, SECURED DEBT AND AGGREGATE DEBT Alaska $4,721,694 Minnesota $75,386,314 Ohio $15,923,380 Tennessee $1,563,230 2015-2018 MIDSTREAM BANKRUPTCY FILINGS BY LOCATION 2015-2018 MIDSTREAM SECURED AND UNSECURED DEBT BY FILING LOCATION (As of August 31, 2018) 10 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 ENERGY M&A CASE STUDY HAYNES AND BOONE’S CAPITAL MARKETS PRACTICE GROUP REPRESENTS UPSTREAM AND MIDSTREAM COMPANY IN SPAC TRANSACTION HAYNES AND BOONE CLIENT Alta Mesa Holdings, LP (“Holdings”), initially formed in 1987, operated as a privately held limited partnership with publicly held debt and oil and gas assets located primarily in the STACK play in Oklahoma. In 2015, an affiliate of Holdings, as an anchor producer, and certain other investors formed a limited liability company, Kingfisher Midstream, LLC (“Kingfisher”) to gather, process and market production in the STACK play via state-of-the-art infrastructure and systems meant to return higher yields than the older midstream assets in the area. COUNTERPARTY Silver Run Acquisition Corporation II (“SRII”), which was formed in November 2016 by an affiliate of Riverstone Holdings, a private equity firm, with Jim Hackett, former Anadarko Petroleum Corporation chief executive officer and a partner of Riverstone, as chief executive officer. SRII, a blank check company with no assets, was structured as a SPAC (a special purpose acquisition company) with the purpose of acquiring oil and gas assets through a business combination. In March 2017, SRII raised over $1.0 billion from its initial public offering and private placement of warrants with its common stock and public warrants traded on the Nasdaq Capital Market. TRANSACTION OVERVIEW Holdings’ primary sources of capital were investments from private equity partners, bank debt, public debt issuances and cash flows from operations. In 2016, Holdings, in search of substantial capital to finance its expanding operations, initiated a traditional initial public offering and filed a confidential Form S-1 Registration Statement under the JOBS Act with the Securities and Exchange Commission (the “SEC”). However, by the time the SEC completed its review of the Form S-1 Registration Statement, the IPO market was no longer favorable for exploration and production companies. Seeking other alternatives, Holdings and Kingfisher began discussions regarding a business combination with SRII. In August 2017, Holdings, Kingfisher and SRII entered into definitive agreements to combine the entities using an “Up-C” structure in a business combination valued at approximately $3.8 billion. For further reading and analysis, please download the full article. 11 HAYNES AND BOONE CLIENT Major International Bank (“Bank”) with a global commodities business, but new to crude oil and refined product intermediation in the United States. COUNTERPARTY Largest Refining Complex on the Eastern Seaboard (“Refinery”). TRANSACTION TYPE – INVENTORY MONETIZATION The transaction was structured to monetize the Refinery’s inventory, which involves intermediation of both crude oil and refined products. This structure results in full inventory ownership by the Bank until such time as the Refinery needs to buy crude for consumption or refined product for sale into the market. Intermediation allows for just-intime inventory management, and also provides for full supply chain sourcing arrangements to be put into place. Crude and refined product ownership by Bank is predicated on true sale title and risk transfer to Bank, which requires a true sale legal opinion to be issued by a law firm. Both legal and accounting true sale are expected. Accounting true sale involves off balance sheet treatment of the inventory. Legal true sale involves certainty of non-recharacterization risk in a bankruptcy scenario. In other words, parties to a true sale want to know that the absolute conveyance of the inventory (i.e., the sale of the inventory) will be respected in a bankruptcy setting and not overturned. TRANSACTION CHALLENGE Refinery is in Chapter 11 bankruptcy with the final piece of the emergence plan requiring a new intermediation structure provided by Bank to cover all Refinery inventory. TRANSACTION MILESTONE On August 7, 2018, Refinery announced that it completed its financial restructuring process and emerged from Chapter 11 following the earlier confirmation of its plan of reorganization by the United States Bankruptcy Court for the District of Delaware. Bank’s transaction with Refinery — a new $900 million hydrocarbon intermediation facility — was a key component of the plan of reorganization to be phased in (in addition to Refinery restructuring more than $635 million of funded debt and arranging for $260 million in new financing). HAYNES AND BOONE’S COMMODITIES PRACTICE GROUP REPRESENTS MAJOR INTERNATIONAL BANK IN CRUDE OIL AND REFINED PRODUCTS INTERMEDIATION DEAL IN THE UNITED STATES For further reading and analysis, please download the full article. COMMODITIES TRANSACTION CASE STUDY 12 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 ENERGY LAW UPDATES For further reading and analysis, please refer to our article “Enforceability of OCC Reserve Based Lending Guidelines.” ARE THE OCC’S RESERVE-BASED LENDING GUIDELINES ENFORCEABLE? Two years ago, right after crude oil prices hit rock bottom in the middle of the worst downturn for U.S. producers since the 1980s, the Office of the Comptroller of the Currency (“OCC”) revised its Handbook for Examination of Oil and Gas Exploration and Production Lending (“E&P Handbook”). The updated E&P Handbook introduced new metrics by which bank examiners were intended to evaluate the repayment risks on banks’ loans secured by oil and gas reserves, or reserve-based loans. The unexpected changes announced by the OCC — in the midst of an already stressful commodity price downturn — added to angst and consternation among energy lenders and their oil and gas borrowers. Importantly, the OCC made these changes to the E&P Handbook without first submitting them to Congress for review and approval under the Congressional Review Act (“CRA”). A few years before the revised E&P Handbook was issued, the OCC, along with other agencies responsible for oversight of national banks, issued a similar update to guidance for the evaluation of “leveraged loans” under the Interagency Guidance on Leveraged Lending (leveraged lending guidance). Similar to the updates to the E&P Handbook, the agencies issued their updated guidance without first submitting it to Congress for review and approval under the CRA. In 2017, following an inquiry by Senator Pat Toomey, the Government Accountability Office (“GAO”) reviewed whether the OCC and other agencies’ action with respect to the updated leverage lending guidance complied with the CRA and concluded that it did not. Following the GAO’s decision, officials at the OCC and Federal Reserve have publicly stepped back from enforcing the updated leverage lending guidance. Although the GAO’s decision related to the leveraged lending guidance, the same determination should be made with respect to the updated E&P Handbook because it is similar to the leveraged lending guidance when it comes to scope, purpose and effect on banks. 13 ENERGY LENDER’S LIABILITY CLARIFIED UNDER LOUISIANA LAW In the latest ruling from the contentious Gloria’s Ranch case (Gloria’s Ranch, L.L.C. v. Tauren Exploration, Inc., 2018 La. LEXIS 1694), the Supreme Court of Louisiana reversed the lower courts’ decisions that held Wells Fargo Energy Capital, Inc. (“Wells Fargo”), as the mortgagee of a mortgage granted by a mineral lessee, solidarily liable with the mineral lessee mortgagor for the lessee’s failure to release an expired oil and gas lease covered by the mortgage. The Supreme Court also held that Wells Fargo was not responsible for a lessee’s failure to release a lease in which Wells Fargo held a net profits interests and overriding royalty interest granted by the lessee. This decision will calm concerns of energy lenders, who feared a chilling effect on secured oil and gas financing in Louisiana if solidary liability was upheld. For further reading and analysis, please refer to our article “A Sigh of Relief: Oil and Gas Lender not Liable, as Mortgagee, for Failure to Release Expired Leases.” For further reading and analysis, please refer to our article “Retained Acreage Clauses in Texas Leases.” RETAINED ACREAGE CLAUSES IN TEXAS LEASES In April 2018, the Supreme Court of Texas rendered decisions in two cases involving disputed “retained-acreage” clauses found in oil and gas instruments. Broadly, these “retained-acreage” clauses vary widely and prescribe the portion of the lease that remains upon expiration of the applicable primary term, or in certain cases, the cessation of continuous drilling operations. Although the Court applied the same principles to these companion cases, the Court reached different conclusions, with each turning upon the specific language in each instrument’s retained-acreage clause (Endeavor a lease, XOG an assignment). These two cases are an important reminder to operators, lessees and lessors to particularly focus on retained-acreage clauses, both in terms of avoiding ambiguity in the provision itself and their interaction with applicable field rules and the proration designation (whether or not a plat is required) for each well. As the Court cautioned in its XOG decision, these two cases “apply the same principles and ascribe the words the parties chose their plain meaning.” Two years ago, after a slew of bankruptcies in the energy sector triggered by a dramatic drop in commodity prices during the worst downturn for U.S. energy producers since the 1980’s, the Office of the Comptroller of the Currency (“OCC”) issued new guidance that proposed changes to underwriting analysis and loan risk rating determinations by national banks and federal savings associations of loans secured by oil and gas reserves (“RBLs”). Driven by a concern that banks were not appropriately capturing risks associated with increased overall leverage in the exploration and production (“E&P”) industry, the guidelines introduced new metrics by which bank examiners were supposed to evaluate the repayment risks on RBLs. In particular, these revised guidelines introduced a leverage test, which was the largest hurdle for E&P companies to overcome. THE LEVERAGE TEST THROUGH THE YEARS AND A 2018 UPDATE The changes to the guidelines added to the anxiety being felt throughout the energy industry and resulted in a large majority of E&P borrowers being categorized as “classified” or otherwise non-passing credits. When the guidelines were originally published in 2016, we analyzed a group of 58 E&P companies based on publicly available data and predicted how they would fare under the OCC’s leverage test that had recently been announced. Based on that review, we predicted that, in 2016, over 91 percent of the companies reviewed would not pass the OCC’s leverage test. Those companies had an average leverage ratio 6.0x — much higher than the 3.5x needed to be deemed a passing credit. In September 2017, we updated our initial review, which revealed that 2016 and 2017 very closely tracked our initial predictions, and which suggested that we would start to see an uptick in companies passing the leverage test by 2019. In August 2018, we once again updated our review. At the time of the update, 2018 was turning out to be better than we predicted, with approximately 74 percent of the companies passing 14 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 MUCH ADO ABOUT LENDING: A BACKWARDS LOOK AT THE OCC’S 2016 LEVERAGE TEST For further reading, analysis and charts, please download the full article. 2020 2.2x 2.4x 3.5x PASS RATING 2018 2.9x 2019 AVERAGE DEBT TO EBITDA RATIO $1.48 billion $2 billion $1.87 billion 2018 2019 2020 AGGREGATE DEBT AVERAGE DEBT billion billion billion $20.7 $14.1 $11.2 the leverage test (compared to 58 percent predicted as of September 2017), and an average leverage ratio of 2.9x (compared to 3.4x predicted as of September 2017). Calendar year 2019 also looks better than we previously predicted, with approximately 87 percent of the companies passing the leverage test (compared to 74 percent predicted as of September 2017), and an average leverage ratio of 2.4x (compared to 2.9x predicted as of September 2017). By the time we reach 2020, we estimate that the average leverage ratio of the companies we reviewed will be 2.2x and approximately 89 percent of those reviewed will pass the leverage test — this would be quite a turnaround in four years, given our 2016 prediction that 91 percent would fail the leverage test in that year. Similarly, the data indicates that approximately $11.2 billion in debt would need to be shed to bring the non-passing companies into compliance with the leverage test in 2020, which is a far cry from the $108.25 billion that we predicted for 2016. These graphs detail the predictions from our 2018 review. 15 PASSING VS. NON-PASSING CREDITS – 2018 PROJECTIONS DEBT TO SHED - 2018 PREDICTIONS AVERAGE LEVERAGE RATIOS – 2018 PREDICTIONS BREAKDOWN OF POTENTIAL SNC RATINGS FOR RBLs PASS NON-PASS 2018 2019 2020 47 7 40 14 48 6 BREAKDOWN OF POTENTIAL SNC RATINGS FOR RBLs PASS NON-PASS 2018 2019 2020 47 7 40 14 48 6 Breakdown of potential SNC ratings for RBLS Average leverage ratios — how close are they to passing? Amount of debt to be shed for a pass rating 16 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 Although royalty underpayment litigation has existed since the inception of the United States oil and gas industry, the shale revolution profoundly impacted this type of litigation. This article analyzes nationwide trends in the filing and certification of royalty class action cases, which result in much greater exposure to producers than individual royalty owner cases. For example, in the past five years, producers have settled class actions for amounts in excess of $80 million. Ninety-six putative class actions filed during the period from 2001 to the present are analyzed in this article. Since Congress enacted the Class Action Fairness Act of 2005 (CAFA), most of these cases were litigated in federal court. These cases deal almost exclusively with alleged underpayment of natural gas royalties (oil royalty litigation rarely arose during the period analyzed). Typically, a producer sells raw gas to an affiliated or non-affiliated entity at the wellhead. The gas is subsequently gathered, compressed, dehydrated, treated, processed and transported to downstream markets where the buyer resells it to third parties at published index prices. The producer receives a wellhead price for the raw gas that is determined by an arithmetic formula based upon the buyer’s weighted average resale price adjusted for the buyer’s post-production costs. This formula is commonly referred to as the netback method. Ultimately, the producer pays natural gas royalties based upon the wellhead price that is determined by this formula. CLASS ACTION ROYALTY LITIGATION IN THE SHALE PLAYS 0 10 20 30 40 50 60 70 0 5 10 15 20 25 Class Actions Filed Classes Certified Nationwide Arkansas Colorado Kansas Kentucky Louisiana Montana New Mexico North Dakota Ohio Oklahoma Pennsylvania Texas Virginia West Virginia Wyoming 2001-2009 CLASS ACTIONS FILED AND CLASSES CERTIFIED The analysis on the right is divided into two time periods: 2001 to 2009 and 2010 to 2018. January 1, 2010 was chosen as a rough approximation of the date on which production in many of the shale plays reached a critical mass. 0 10 20 30 40 50 60 70 0 5 10 15 20 25 Nationwide Arkansas Colorado Kansas Kentucky Louisiana Montana New Mexico North Dakota Ohio Oklahoma Pennsylvania Texas Virginia West Virginia Wyoming Class Actions Filed Classes Certified For further reading and analysis, please download the full article. 17 2010-2018 CLASS ACTIONS FILED AND CLASSES CERTIFIED The cases selected for analysis generally involve three discrete legal issues: 1. Whether the producer must pay royalties based upon the higher downstream resale price that its gas buyer receives rather than the lower wellhead price that the producer receives. 2. Whether the buyer’s post-production costs, which are included in the formula for calculating the producer’s wellhead price, are reasonable. 3. Whether transactions in which the producer sells gas to an affiliate are legitimate. 18 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 LATEST HAYNES AND BOONE ENERGY NEWS HAYNES AND BOONE HANDLES MERGER NAMED TOP 2017 DEAL BY TEXAS LAWYER Haynes and Boone represented Alta Mesa Holdings, LP in a merger that Texas Lawyer has selected as one of the state’s top deals in 2017. Houston Partner Bill Nelson led the team that advised Alta Mesa, which on February 9, 2017 completed its $3.8 billion combination with Silver Run Acquisition Corporation II and Kingfisher Midstream, LLC. Nelson was assisted on the matter by Haynes and Boone Partners Kristina Trauger, Vicki Odette, Sam Lichtman, Buddy Clark, Jesse Gelsomini and Kraig Grahmann; Counsel John Menke; and Associates Kristin Santamaria, Nick Rice, Don Shiman, Sameer Saxena, Janna Mouret and Simin Sun. HAYNES AND BOONE BOLSTERS ENERGY PRACTICE WITH OFFICE IN THE WOODLANDS Haynes and Boone opened an office in 2018 in The Woodlands, a fast-growing corporate hub near Houston. The new office, the firm’s 16th worldwide, will allow Haynes and Boone to better serve its clients, including those with offices in The Woodlands, which is home to many major energy and oilfield services companies. ABOVE THE LAW RANKS HAYNES AND BOONE AS A TOP ENERGY PRACTICE Legal news website Above the Law ranks Haynes and Boone among the top 10 U.S. energy law firms based on a survey of in-house counsel in the energy industry in 2018. HAYNES AND BOONE RECOGNIZED IN CHAMBERS LEGAL DIRECTORIES Haynes and Boone Energy, Power and Natural Resources lawyers were recognized as leading lawyers in Chambers USA 2018, Chambers Latin America 2019, and Chambers Global 2018, published by Chambers and Partners. UPCOMING HAYNES AND BOONE ENERGY EVENTS HOUSTON OIL CRASH COURSE SERIES October and November 2018 OILFIELD SERVICES SERIES November 2018 NAPE RECEPTION February 2019 NEW YORK OIL AND GAS FINANCE AND INVESTMENT SEMINAR January, April and September 2019 OIL AND GAS INVESTMENT SYMPOSIUM RECEPTION April 2019 NAPLES, FLORIDA IECA 94TH ANNUAL CONFERENCE RECEPTION AND AFTER HOURS PARTY September 2018 LONDON PRIVATE EQUITY INVESTMENTS IN US OIL AND GAS ASSETS May 2019 DALLAS ENERCOM DALLAS RECEPTION February 2019 LTSA WEBINAR UPDATE ON OIL AND GAS FINANCE December 2018 Please see your Haynes and Boone contact for further information about these or other events. 19 A recent Op-Ed in the New York Times called “The Next Financial Crisis Lurks Underground,” based on excerpts from Bethany McLean’s just published book, Saudi America: The Truth about Fracking and How It’s Changing the World, publicizes recent narratives from short sellers that oil and gas companies’ tendency to prefer reserve growth over cash earnings is a harbinger of an unprofitable industry that will soon see large re-valuations. McClean’s Op-Ed and her book rely heavily on statistics during the recent downturn, which is a snapshot of an industry at its worst period when costs were high and prices were low. A reexamination of the same premise today would find the opposite to be true. One need look no further than the more current data in the Haynes and Boone Energy Roundup to see the improvement. The oil and gas industry is a dynamic and ever-changing business. Producers know that relying on outdated information and last year’s business plans can be a recipe for disappointment. Journalists attempting to predict the future by extrapolating data taken at the nadir of the last business cycle are as likely to be disappointed in the outcome of their predictions. Haynes and Boone Partner Diana Liebmann’s more than 20-year career in transactional and regulatory energy law has earned her a spot on Law360’s 2018 list of “10 INFLUENTIAL WOMEN IN ENERGY LAW.” Diana is recognized for being on the ground floor of efforts to deregulate the energy sector in Texas and helping the California State Assembly craft legislation to resolve that state’s power crisis. © 2018 Haynes and Boone, LLP haynesboone.com IS FRACKING THE NEXT FINANCIAL CRISIS? For further reading and analysis, please download the full article. 20 HAYNES AND BOONE ENERGY ROUNDUP FALL 2018 ENERGY, POWER AND NATURAL RESOURCES PRACTICE GROUP PHIL LOOKADOO CO-CHAIR–COMMODITIES PRACTICE +1 202.654.4510 email@example.com DIANA LIEBMANN CHAIR–POWER AND RENEWABLES PRACTICE +1 210.978.7418 firstname.lastname@example.org MICHAEL MAZZONE CO-CHAIR–ENERGY LITIGATION PRACTICE +1 713.547.2115 email@example.com BUDDY CLARK CO-CHAIR–ENERGY PRACTICE +1 713.547.2077 firstname.lastname@example.org KRAIG GRAHMANN CHAIR–ENERGY FINANCE PRACTICE +1 713.547.2048 email@example.com AUSTIN ELAM CHAIR–OIL AND GAS PRACTICE +1 713.547.2122 firstname.lastname@example.org CHRIS WOLFE CHAIR–OILFIELD SERVICES PRACTICE +1 713.547.2024 email@example.com JEFF NICHOLS CO-CHAIR–ENERGY PRACTICE +1 713.547.2052 firstname.lastname@example.org CRAIG STAHL CO-CHAIR–ENERGY LITIGATION PRACTICE +1 713.547.2304 email@example.com KIRSTEN POLYANKSY CO-CHAIR–COMMODITIES PRACTICE +1 713.547.2069 firstname.lastname@example.org KEY CONTACTS 21 THANKS TO THOSE WHO CONTRIBUTED TO THE FIRST EDITION OF THE ENERGY ROUNDUP REPORT. DAVID AMMONS PARTNER, HOUSTON, ENERGY LITIGATION +1 713.547.2066 email@example.com BUDDY CLARK PARTNER, HOUSTON, CO-CHAIR– ENERGY PRACTICE +1 713.547.2077 firstname.lastname@example.org KRAIG GRAHMANN PARTNER, HOUSTON, CHAIR– ENERGY FINANCE PRACTICE +1 713.547.2048 email@example.com CHAD MILLS PARTNER, HOUSTON, ENERGY PRACTICE +1 713.547.2900 firstname.lastname@example.org BILL NELSON PARTNER, HOUSTON, CO-CHAIR– CAPITAL MARKETS PRACTICE +1 713.547.2084 email@example.com JEFF NICHOLS PARTNER, HOUSTON, CO-CHAIR– ENERGY PRACTICE +1 713.547.2052 firstname.lastname@example.org IAN PECK PARTNER, DALLAS, FORT WORTH, CHAIR–RESTRUCTURING PRACTICE +1 214.651.5155 email@example.com KIRSTEN POLYANSKY PARTNER, HOUSTON, ENERGY PRACTICE +1 713.547.2069 firstname.lastname@example.org KRISTINA TRAUGER PARTNER, HOUSTON, CAPITAL MARKETS PRACTICE +1 713.547.2030 email@example.com JUDY LITTLE COUNSEL, HOUSTON, CAPITAL MARKETS PRACTICE +1 713.547.2235 firstname.lastname@example.org LAURA MARTONE COUNSEL, ORANGE COUNTY, FINANCE PRACTICE +1 949.202.3065 email@example.com REEM ABDELRAZIK ASSOCIATE, HOUSTON, ENERGY PRACTICE +1 713.547.2998 firstname.lastname@example.org AUSTIN ELAM ASSOCIATE, HOUSTON, CHAIR–OIL AND GAS PRACTICE +1 713.547.2122 email@example.com ANDREW GILLESPIE ASSOCIATE, DENVER, RESTRUCTURING PRACTICE +1 303.382.6202 firstname.lastname@example.org JANNA MOURET ASSOCIATE, HOUSTON, CAPITAL MARKETS PRACTICE +1 713.547.2070 email@example.com CHRIS REAGEN ASSOCIATE, DENVER, ENERGY PRACTICE +1 1 303.382.6212 firstname.lastname@example.org KATY SHURIN ASSOCIATE, HOUSTON, ENERGY PRACTICE +1 713.547.2280 email@example.com DAVID STAAB ASSOCIATE, FORT WORTH, RESTRUCTURING PRACTICE +1 817.347.6645 firstname.lastname@example.org MIKE STEWART ASSOCIATE, HOUSTON, ENERGY PRACTICE +1 713.547.2113 email@example.com KELSEY ZOTTNICK ASSOCIATE, HOUSTON, RESTRUCTURING PRACTICE +1 713.547.2022 firstname.lastname@example.org AUSTIN DALLAS AREA DENVER HOUSTON AREA NEW YORK ORANGE COUNTY SAN ANTONIO WASHINGTON, D.C. MEXICO CITY LONDON 1 8 6 3 2 19 13 4 7 40 © 2018 Haynes and Boone, LLP OFFICES AUSTIN 600 Congress Avenue Suite 1300 Austin, TX 78701 United States of America T +1 512.867.8400 F +1 512.867.8470 CHICAGO 180 N. LaSalle Street Suite 2215 Chicago, IL 60601 United States of America T +1 312.216.1620 F +1 312.216.1621 DALLAS 2323 Victory Avenue Suite 700 Dallas, TX 75219 United States of America T +1 214.651.5000 F +1 214.651.5940 DENVER 1050 17th Street Suite 1800 Denver, CO 80265 United States of America T +1 303.382.6200 F +1 303.382.6210 FORT WORTH 301 Commerce Street Suite 2600 Fort Worth, TX 76102 United States of America T +1 817.347.6600 F +1 817.347.6650 HOUSTON 1221 McKinney Street Suite 2100 Houston, TX 77010 United States of America T +1 713.547.2000 F +1 713.547.2600 LONDON 29 Ludgate Hill London EC4M 7JR United Kingdom T +44 (020) 8734 2800 F +44 (020) 8734 2820 MEXICO CITY Torre Esmeralda I, Blvd. Manuel Ávila Camacho #40 Despacho 1601 Col. Lomas de Chapultepec 11000, Ciudad de México Mexico City, Mexico T +52.55.5249.1800 F +52.55.5249.1801 NEW YORK 30 Rockefeller Plaza 26th Floor New York, NY 10112 United States of America T +1 212.659.7300 F +1 212.918.8989 ORANGE COUNTY 600 Anton Boulevard Suite 700 Costa Mesa, CA 92626 United States of America T +1 949.202.3000 F +1 949.202.3001 PALO ALTO 525 University Avenue Suite 400 Palo Alto, CA 94301 United States of America T +1 650.687.8800 F +1 650.687.8801 RICHARDSON 2505 North Plano Road Suite 4000 Richardson, TX 75082 United States of America T +1 972.739.6900 F +1 972.680.7551 SAN ANTONIO 112 East Pecan Street Suite 1200 San Antonio, TX 78205 United States of America T +1 210.978.7000 F +1 210.978.7450 SHANGHAI Shanghai International Finance Center, Tower 2 Unit 3620, Level 36 8 Century Avenue, Pudong Shanghai 200120, P.R. China T +86.21.6062.6179 F +86.21.6062.6347 THE WOODLANDS 10001 Woodloch Forest Drive Suite 200 The Woodlands, TX 77380 United States of America T +1 713.547.2100 F +1 713.547.2101 WASHINGTON, D.C. 800 17th Street NW Suite 500 Washington, D.C. 20006 United States of America T +1 202.654.4500 F +1 202.654.4501 HAYNES AND BOONE ENERGY LAWYERS BY REGION
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Fall 2018 Energy Roundup
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