When oil prices fell precipitously in the second half of 2014, many predicted that the resulting financial pressures on U.S. E&P companies would force them to rapidly scale back production. To date, the industry has defied these predictions – greater efficiency, high-grading of drilling plans, cost savings, robust capital raising and strong hedging positions have allowed domestic producers to maintain production at or near historically high levels even with rig counts falling significantly. However, the impact of some of the factors that have helped sustain production in the face of lower prices may now be eroding. In particular, the pace of capital raising has slowed significantly in recent months, with some planned offerings being pulled due to adverse market conditions. In addition, the benefits of deeply in-the-money hedge positions entered into before the 2014 price decline and the dramatic improvements in cost structures seen earlier this year cannot be continued indefinitely. Finally, with reports of concerned bank regulators questioning the quality of some loans made to energy producers and renewed pressure on commodities prices, it may turn out that predictions of a period of significant retrenchment in the industry will, belatedly, prove to be correct.
In this environment, many companies will continue to be focused on shoring up their balance sheets and/or liquidity positions and, when circumstances permit, acquiring new assets at what may prove to be bargain prices. This alert provides some thoughts on these topics from a legal perspective.