Buying E&P assets out of bankruptcy is like a chess game, and bidders have a better chance of winning if they understand the options available to them, says Michael Mitchell, senior managing director of Mitchell Energy Advisors.

Mitchell was a presenter on the webinar, “Buying E&P Assets Out Of Bankruptcy: How to get ahead in the line,” presented by Hart Energy Publishing’s Oil and Gas Investor.

Register for the archived webinar here.

“Complexity in a bankruptcy case is your friend. If you put forth a plan and set up a total solution, it makes it more difficult for others to match that bid and gives you a competitive advantage,” he said.

Strategy is important to being successful in the bankruptcy arena. Thompson and Knight partner Rhett Campbell said a key strategy for an interested buyer is to be the initial best bid, known as the “stalking horse” bid. The debtor chooses the best bidder and negotiates a contract with that bidder, which becomes the measure that all other bidders must best.

“An important part of being the stalking horse bidder is you can control the process because it’s your contract that others are negotiating against. Being the stalking horse bidder can be valuable,” said Campbell.

Bank of America/Merrill Lynch director Steve Almrud said the first mover can achieve many benefits by being the stalking horse by negotiating the terms of the purchase and sale agreement up front. “All competing bidders must be willing to match the material terms of the stalking horse bid.”

He said bidders can draft a plan that garners a competitive advantage through complexity, although all plans are subject to court approval.

Mitchell agrees, and suggests the offer takes into consideration the claims of the creditors. And while cash is king in a bankruptcy asset offer, offering a net profit interest in future wells to be drilled instead of cash to creditors is an example of a complex offer that might find favor with the court.

“It makes it more difficult than comparing apples with apples as with just a dollar amount,” he said. “That in conjunction with a break-up fee (as part of the negotiated contract) gives you the best odds of being successful.”

The highest and best bid is always chosen in a bankruptcy case, but best is not always highest. Almrud said cash consideration carries the most weight in a judge’s decision, which typically involves bank financing. Debt and equity commitments “need to be brought in early in the process if you want to have credibility,” he said.

Simply being an interested purchaser does not give a bidder “standing” in the court to access privileged information. “If you want a seat at the table,” suggests Campbell, “you need to be a creditor. One way to do that is to buy a claim.”

Interested buyers can buy either a secured or unsecured claim from someone holding a debt in the bankruptcy, often at a significant discount to the face value.

“If you buy a secured claim you move closer to the front of the room,” he said. “Of course, if you’re the senior secured lender, then you’re at the head of the table. The nature of the claim you buy is important to think about.”

“We’ve used that successfully,” Mitchell added.

Another strategy: be the debtor-in-possession (DIP) lender, said Campbell. The debtor filing bankruptcy needs capital in a plan of reorganization, and the DIP lender has access to a great amount of information about the debtor. In providing the DIP financing, the debtor will pay for the due diligence as part of the loan, and the lender will be at the front of the line if the debtor decides to sell assets.

Almrud emphasized that while the debtor is often viewed as being in distressed, they shouldn’t be ignored in the process if you want to win. “The debtor is in control of the process to a large degree, and there are many ways to garner the debtor’s support in competitive plans that can push a competing plan over the top and be declared the winner at the end of the day.”

Finding E&P assets in bankruptcy can be difficult as there is no clearinghouse of information on bankrupt assets, which creates opportunity, according to Campbell.

“It’s a disaggregated marketplace, and that’s why a lot of buyers find it opportunistic to do well.” He uses sources such as Bloombergs, “Bankruptcy Law 360,” “The Troubled Company Reporter,” Pacer and the Dow Jones newswire to track companies filing Chapter 11.

“It requires constant attention,” he said. “You have to be aware that an E&P company is in bankruptcy, what their assets are and be paying attention to the point in time when they announce they will be offering assets for sale.”

The relationship part of the business can’t be overstated, Almrud said. “It takes an advisor with a long database of potential buyers to try to generate the type of interest that it takes to find a successful buyer of bankruptcy assets. It takes people with the right appetite to get involved in the process.”

The best way to learn about these opportunities is to stay in touch with property brokers that work in the business. “Get on their call list. They should call you when opportunities arise.”

--Steve Toon