What to Do When the Drills Stop Turning

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With the onset of the coronavirus pandemic, oil prices dropped precipitously, and oil and gas producers hit a rough patch. Drilling all but stopped and capital dried up, while producing wells continued to decline.

For many, the downturn was too much to handle. As a non-operating working interest owner, you may not know that your operator is in financial trouble until you receive a bankruptcy petition. Then what do you do?

First, identify how many wells you own an interest in, what state(s) those wells are located in, and whether you have any unpaid revenue as of the bankruptcy petition date. Your debtor operator will likely file “first day motions,” one of which will request approval from the Bankruptcy Court to pay monthly revenue in the ordinary course.

That motion will usually be approved, and a debtor operator will usually pay post-petition revenue to avoid further issues in bankruptcy. In rare cases, a debtor operator may seek to abandon wells that are uneconomical, but that can get tricky for all parties.

Next, you should figure out whether or not it makes sense to file a proof of claim. If so, you must determine if your claim is secured, priority or unsecured. For pre-petition unpaid revenue, your debtor operator may seek to avoid paying you by claiming that the debt is unsecured. Depending upon the number of wells you own an interest in and their production, that debt could be substantial.

For wells that are located in Oklahoma, it is imperative that you file a proof of claim and assert your lien rights, as Oklahoma law provides a statutory owner’s lien against both the oil and gas produced and any related proceeds. In other words, you most likely have a secured claim against the money paid by a purchaser and held by your debtor operator on your behalf. Secured claims will almost always be paid in bankruptcy, but only if a proof of claim is filed.

For Texas wells, Texas law provides a similar lien, but it is based upon the Uniform Commercial Code (UCC) as opposed to Oklahoma’s lien based in real property law, so the state of incorporation of your debtor operator also matters.

If your debtor operator is incorporated in Texas, then the process is similar to that of Oklahoma. If your debtor operator is incorporated in another state, however, you must look to that state’s UCC and lien laws to determine if you need to file a financing statement or take some other action in order to perfect your owner’s lien. If the wells are outside of Oklahoma or Texas, you must look to that state’s laws first, to see if an owner’s lien is even available. There are several other states that have some form of statutory owner’s lien, but many do not.

At the end of the day, properly perfecting an owner’s lien and filing a proof of claim can secure your right to payment of pre-petition revenue when your operator files bankruptcy. These issues can become highly technical, so the advice of bankruptcy counsel is strongly recommended.

This article first appeared in The Journal Record on September 17, 2021, and is reproduced with permission from the publisher.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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