The headline on the front page of the May 11, 2016, Wall Street Journal suggests a cautionary tale for deal makers in all areas of the oil and gas industry: Oil Bust Squeezes Deal-Maker. It’s a story of “buyer’s remorse” on a $33 billion dollar purchase.
According the article, Energy Transfer Equity, LP, a Dallas company led by well-known oil man Kelcy Warren, is “scrambling to restructure or escape”
an agreement to acquire Williams Cos., a pipeline company based in Tulsa. This deal was announced seven months ago and the well-chronicled volatility in the price of oil and gas apparently made the deal economically challenging, which led to finger-pointing on both sides and a lawsuit filed in Delaware.
There are billions of dollars at stake in this “deal-gone-south”, which can provide lessons for independent and private equity backed operators doing deals in these chaotic times for the oil business.
Time Kills Deals
Dallas-based attorney, Craig Stokley, a founding member of the firm Palter Stokley Sims PLLC, who specializes in oil and gas litigation and transactional issues, thinks these types of situations can be avoided for smaller independent and private equity operators in the oil field. How? A close connection between those performing due diligence and those striking the deal on behalf of the two parties. Not only is it important that the parties strike a deal they are pleased with, it is equally important that both sides understand the deal the same way– on paper and in their minds.
“Time kills deals,” Stokley added. “If an operator is acquiring an asset, whether it involves billions or thousands of dollars, an increasing length of time between striking the deal and closing exponentially increases the chances of the deal ‘blowing up’.
“In these volatile times, it is critical to make sure the detailed due diligence is effectively and timely summed up for the deal makers so that the deal they strike can match reality on the ground.”
Stokley noted that in any acquisition of oil and gas assets, there are:
- Joint Operating Agreements
- Historical joint interest billing statements
- Byproduct (i.e. produced water) from production and the costs associated with transportation and disposal of this byproduct
- Equipment, personal property, fixtures, and improvements such as pumping units, pipelines, gathering systems, salt water disposal wells, water wells, tanks, compression equipment, etc.
- Pooling Agreements, hauling agreements, and other master service agreements that may or may not be assignable
- Oil and gas marketing commitments
- Title Opinions
“With all of these variables, it is very important that legal counsel and deal makers understand what is important when structuring their deal,” he added.
Avoiding the Courthouse is Good BusinessAll of the attorneys at Palter Stokley Sims, and Craig Stokley in particular, are readily prepared to litigate issues when deals and business relationships go bad. That is their “bread and butter.” In order to help clients avoid such disputes, Palter Stokley Sims places a premium on due diligence and getting to know the client’s goals. This allows the firm to help its oil and gas clients to invest in opportunities which yield a better return on investment. This puts Stokley’s clients in a better position than their competitors by saving valuable time and resources when compared to the typical independent or private-equity private- equity backed operator whose structure does not justify a full-time in-house counsel.
“Non-refundable deposit payments, with a liquidated damages provision, will enable all parties to avoid a court proceeding seeking specific performance,” Stokley said. “Such lawsuits, similar to the one between Energy Transfer and William’s can paralyze an operator and cause them to miss out on future opportunities, while trying to sort out the specific performance issues in protracted litigation. While some parties may insist upon specific performance, if the deposit payment is high enough, they will almost always agree to a liquidated damages provision.”
Stokley cautions that the excitement of “getting a deal done” can often obscure reality.
“In the end, you want a knowledgeable person negotiating the deal who understands the due diligence of the asset so the negotiations reflect reality,” noted Craig Stokley. “This can be accomplished with a ‘get to know the clients’ business’ approach by counsel who works closely with the deal makers at the table when the deal is struck. Knowing my clients’ business is what I strive to achieve.”
While the size of the mega-deals such as the Energy Transfer purchase of Williams pipeline are rare, they provide cautionary lessons for smaller outfits in the energy business. If you are in the energy business and either desire knowledgeable, timely counsel for your deal making, or find yourself in need or a trusted, experienced litigator, the attorneys at Palter Stokley Sims are available to consult with you. Just click here for more information.