DENVER—Debt is the bugaboo for many oil and gas companies today. Companies with significant debt loads are reeling from the punches delivered by low commodity prices, bank redeterminations, an inability to access equity or debt markets and unfavorable terms (in their view) for asset sales.

Companies in need of debt restructuring have some strategies available, said Ron E. Meisler, partner, Skadden Arps, at a recent event hosted by Davis, Graham and Stubbs LLC. The annual Energy M&A and Financing Forum brought together nearly 300 attendees for an afternoon of discussions.

At one end of the restructuring continuum is a traditional Chapter 11 reorganization. Since the beginning of 2015, about 60 oil and gas producers have sought various forms of bankruptcy protection, and filings are far from done. The goal of Chapter 11 is to reposition the debtor’s business to be more competitive after it emerges from bankruptcy. The process is often lengthy, contentious and expensive, Meisler said. Companies can spend nine to 18 months in a traditional Chapter 11 process, and it can hurt the credibility of the business and of its management.

Chapter 11 has distinct advantages, nonetheless. It is often used in situations where companies have many or unorganized claimants with substantial and widely held debt. In Chapter 11, creditors cannot pursue payment outside the court process, debt holders can be forced to accept terms they might not like and the court has the ability to reject contracts the bankrupt company previously entered into.

This ability of the court to reject contracts it sees as burdensome is a key feature, and one that is causing some worry in the midstream sector. In the recent bankruptcy case of Sabine Oil & Gas Corp., the court allowed Sabine to reject certain gathering agreements it had with a midstream company on the grounds that doing so was an exercise of good business judgment.

“Bankruptcy is the land of broken promises,” Meisler said. “It matters a great deal in which state the bankruptcy is filed. These questions are decided on a case-by-case basis, and will be very fact-specific.”

There are also variants of Chapter 11 that are negotiated in advance. One alternative is a prearranged Chapter 11. In this option, negotiation and documentation of the reorganization plan takes place before going to court, while the approval of the plan and solicitation of votes occurs after the bankruptcy petition is filed. Prearranged bankruptcies are best applied in cases where a company’s debt is public and widely held, Meisler said. Time frames often run from 90 to 120 days.

Swift Energy Co. (NYSE: SFY) is an example of a pre-negotiated bankruptcy. The firm filed for Chapter 11 protection on Dec. 31, 2015. At the time it filed, Swift had already negotiated a restructuring agreement with holders of more than 50% of its notes. It filed a reorganization plan on Feb. 4, which was confirmed on March 31. Swift emerged from bankruptcy on April 25 with a new $320 million credit facility but sold 96% of its equity interest to Texegy LLC.

An even faster route is a pre-packaged bankruptcy. In this variant, the entire reorganization is conducted out of court, with the court only becoming involved once a finalized agreement is in place. This has the advantage of requiring only a majority of debt holders to agree; it usually results in minimal business disruptions; and the exit from bankruptcy can be quite fast, on the order of 15 to 75 days. “Pre-packs are most successful where debt is concentrated among sophisticated holders,” says Meisler.

Cubic Energy’s recent bankruptcy is a pre-pack example. The company filed for bankruptcy on Dec. 11, 2015. The restructuring plan was confirmed in mid-February and its plan took effect on March 1. The noteholders assumed most of the company’s equity in exchange for cancelling Cubic’s debt; the company’s shares are no longer traded.

At the other end of the restructuring continuum are out-of-court transactions. These strategies can include amendments of existing credit documents, exchanges of secured debt for equity, and sales of assets.

“Out-of-court transactions are faster and less expensive than in-court options,” Meisler said. This option is typically governed by general contract law. But, the ability to use out-of-court solutions requires consensus among debt holders, and this may be difficult to attain.

Only accepting debt holders are bound by such an agreement, and when there are numerous parties involved it can be very challenging to get enough to consent to a plan. Holdouts can be a significant risk, and shareholder votes can be required. “We see this option work best when there are few or well-organized claimants,” he said.

For companies under economic stress, Meisler recommended following a dual-track approach. The company works to negotiate its restructuring plan with its various constituents, with an eye to either reaching an agreement for an out-of-court transaction or to confirming a pre-packaged Chapter 11 plan. Either of those two outcomes is preferable to a traditional Chapter 11 filing, from most perspectives.

Peggy Williams can be reached at pwilliams@hartenergy.com.

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