Oil and gas companies frequently use debt financing in order to provide the large capital required to explore and develop largeacreage blocks. With the rise of horizontal drilling in combination with multi-stage hydraulic fracturing, the average cost per well has skyrocketed. In order to access a bank’s cheaper money, an oil and gas company normally must have already found something worth finding. In return for a beneficial interest rate from a bank (as opposed to splitting the profits of the company with equity partners or paying mezzanine debt interest rates), the oil and gas company must get more ducks in a row than it had to get in a row to raise money from their friends and family, a venture equity, or a mezz debt source. Additionally, due to the special characteristics of oil and gas as an asset, special legal issues exist for bank lenders to navigate to insure they can recover on collateral in a first-priority lien position in the event that the oil and gas company borrower goes into bankruptcy.
This Article explores the legal due diligence process of an oil and gas loan deal—addressing both the roles of the borrower’s counsel and the lender’s counsel in the process. Further, it addresses unique issues related to properly securing the collateral of an oil and gas company borrower under Texas law. It should be noted that this Article is related to exploration and production (E&P) companies, not companies involved with the midstream or downstream side of the business. This Article focuses on oil and gas properties located in the state of Texas; while the collateral rules will be almost the same in other states, only the Texas law perspective will be discussed.
Some capitalized terms will be used. The term “Energy Lender” refers to a lender in an oil and gas loan transaction. The term “Borrower” refers to an oil and gas company borrowing money from an Energy Lender.
Jason A. Schumacher,
E&P Lending: Due Diligence and Collateral Legal Issues in E&P Lending Deals for the Texas Law Man in Particular,
Tex. A&M L. Rev.
Available at: http://scholarship.law.tamu.edu/lawreview/vol1/iss2/6