The outlook for oil and gas may be cloudy, but what is clear is the need for companies to work together if they are to survive this crisis of crippled global demand, legal experts said during a recent webinar.

“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,” said Gabriel Procaccini, partner in the Houston office Akin Gump Strauss Hauer & Feld LLP.

Procaccini’s practice focuses on the midstream sector, and he advises companies to “be hyperfocused on finding practical solutions and reasonable compromises to mitigate the risks which have emerged as a result of this crisis,” adding that, “Now is not the time to necessarily stand firm and risk upsetting long-term relationships.”

Painful Realities for Midstream, Upstream

Additionally, with force majeure, or the claim of a counterparty seeking temporary excuse from performance, on everyone’s mind, it is also important to know the precise legal language of your agreements, Procaccini said.

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

“Midstream companies don’t want to be left in a position of trying to find a home for their customers’ crude oil that may not exist or may not exist at a price that anyone likes,” he added.

Procaccini’s advice applies to the upstream sector as well, since producers face similarly painful realities. That some crude producers, as well as gas producers with liquids exposure, might have to pay buyers to take their product forms only part of the trouble; shut-ins and associated contractual difficulties also loom.

“With respect to [upstream] oil and gas, your main concern is avoiding lease terminations due to having no production, maybe shutting-in, or a lack of production and paying quantity,” said partner Michael J. Byrd.

“Usually, low commodity prices alone do not qualify as a force majeure event,” he said, but a government shut-in order, for instance, could lead to a dispute. In Texas, producers must also prepare for the possibility of proration. (The Texas Railroad Commission has scheduled a May 5 vote on a proration proposal.)

To this point, Byrd said, “An order that requires all operators to cut production by [a certain percentage] and allows each operator choose where it makes cuts to avoid issues of waste, termination and contracts, can increase the risk of a dispute.”

With shut-ins, economic and engineering challenges could arise. The chance is greatest in fields where a sudden shut-in risks damaging the reservoir, Byrd said, citing water-injection operations as an example. Shutting in such fields would “involve decisions that truly require input and collaboration between several departments of a company,” he said.

Flexible, Complex Capital Options

Investors, too, must 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,” Partner Thomas J. McCaffrey said.

McCaffrey described a variety of options for investor action, some already undertaken. These actions ranged from waived faults and rescue financing on terms significantly better than the companies could obtain elsewhere to various loan conversion structures, which can be tailored to address the specific needs of the company, he said.

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

Planning for the Future

Faced with myriad risks and ways to mitigate them, the partners at Akin Gump said that companies must continue to plan, to the extent possible, for the future.

“It’s not too late [to plan],” McCaffrey said. “Some companies may find themselves in this difficult business environment, low demand and low commodity prices, but are not in any immediate financial distress.… Companies like that should look ahead and be proactive and consider some nonfinancial aspects of their businesses.”

He listed filling board vacancies with candidates familiar with distressed environments, ensuring strong retention policies to keep management teams in place and even M&A activity as examples.

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

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