In 2011, Stone Energy Corporation and Triad Hunter, LLC entered into a development agreement for the exploration of about 4,200 acres in West Virginia under a 1989 form JOA. Each party owned 50% and Stone was designated as Operator. The operator replacement language in Art. V.B.2. read as follows:
Upon the resignation or removal of Operator …, a successor Operator shall be selected by the parties. The successor Operator shall be selected from the parties owning an interest in the Contract Area at the time such successor Operator is selected. The successor Operator shall be selected by the affirmative vote of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit “A”; provided, however, if an Operator which has been removed or is deemed to have resigned fails to vote or votes only to succeed itself, the successor Operator shall be selected by the affirmative vote of the party or parties owning a majority interest based on ownership as shown on Exhibit “A” remaining after excluding the voting interest of the Operator that was removed or resigned.
In late 2016, Stone filed Chapter 11. In early 2017, Stone filed a motion to sell certain assets, including the West Virginia Acreage to EQT Production Company for $527 million. The sale was properly noticed to all appropriate parties, including Triad, which did not object to the sale.
The bankruptcy court approved the sale and the transaction closed. Stone and EQT provided notice to Triad that Stone had assigned all of its interests, including its rights as Operator, to EQT. Triad responded by asserting it (Triad) was the sole remaining party with an “Exhibit A ownership” and it had opted to select itself as the successor Operator. The court’s Order did not specifically designate EQT as successor Operator.
At a subsequent hearing, EQT complained of Triad’s conduct and its attempts to assume the duties as successor Operator, notwithstanding Stone’s transfer of all of its interests to EQT. The bankruptcy court expressed its “grave concerns” that Triad had not recognized the terms of its sale and that its (Triad’s) rejection of EQT as the successor Operator and self-appointment implied that it did not recognize the validity of the sale and suggested its actions “may cause huge problems [for Triad].” Within days of the hearing, Triad and Stone reached a settlement so that when the JOA was assumed by EQT, Triad would be paid $180,000 to settle its claims (including the damages it asserted would be suffered upon assumption of the JOA). Triad agreed to abandon its efforts to name itself successor Operator, and the parties executed mutual releases. The stipulation approved by the bankruptcy court stated that “the assumption of the Operating Agreement pursuant to the Sale Order remains in full force and effect and such assumption and assignment shall not be altered by this Stipulation.” Thus, EQT became the designated successor Operator of the West Virginia Acreage.
Once the Debtor assumed the JOA, it became binding on all parties including Triad and EQT. When Stone sold its interest to EQT, Stone no longer owned an interest in the Contract Area and was deemed to have resigned. A successor Operator required a vote of two or more owners holding a majority interest but neither EQT nor Triad could muster two votes and neither owned a majority (each held 50%).
There was no basis upon which the bankruptcy court could have forced Triad to accept EQT as Operator once the JOA had been assumed and it seems unlikely that including a designation of EQT as Operator in the order of sale could have prevailed over Triad’s rights. Since neither owned a majority, and neither had a second party to vote with it, the parties were in a contractual standoff and the bankruptcy court used its authority to encourage a settlement in keeping with the sale concept the court had approved.
Had the 2015 JOA been in place, it would have solved one of the problems but not both. First the 2015 JOA no long requires two parties holding a majority to vote for a successor Operator. Second, it still requires a majority vote, but in this case neither Triad nor Stone/EQT held a majority. Likewise, the explicit prohibition on the assignment of the right to operate (“Operatorship is neither assignable nor forfeited except in accordance with the provisions of this Article V”) in the 2015 JOA would not have been determinative. While the prohibition on assignment did not exist in the 1989 form, interpretations of Article V provisions generally made the prohibition on assignment implicit and it might have make it more difficult to include a designation of a successor Operator in the sale documents.
You may want to analyze the operator replacement provisions of your JOA, especially if you are trying to purchase working interests from a debtor or your Operator or a Non-Operator is on shaky financial footing.
