Oilfield Service Bankruptcies – Permission to Pay Mineral Contractors
By Gary Pittman
Due to the nature of the industry in which they operate, oilfield service companies have yet another worry as part of the intensive preparation for a Ch. 11 Bankruptcy filing – the payment of mineral contractors. In the ordinary course of business, oilfield service companies frequently engage subcontractors to perform labor or supply materials and machinery that are essential to serving their customer base. These services and materials are often provided on a project-by-project basis without long-term contracts. Should said oilfield service company default on any obligation to one of its mineral contractor, that mineral contractor is likely to assert a lien against the property of a customer of the oilfield service company whose property the Debtors and the mineral contractor serviced. This could lead to a customer withholding payment to the oilfield service company, or worse, walking away as a customer entirely.
As an example, let’s say oilfield services company ABC LLC rents downhole tools to an operator of an oil & gas well. Should ABC LLC employ a vendor to supply parts to or complete a tool prior to it being rented and used by the operator of an oil & gas well, then this vendor fits the definition of a mineral contractor. Should ABC LLC default on payment to their mineral contractors, they risk mineral liens being filed by their mineral contractors on the properties owned by the ABC LLC ’s customers which potentially jeopardizes their entire business through the duration of a Chapter 11 proceeding. Even the hint of a lien filing on one of their properties could spook ABC LLC ’s customers into stripping their operations of any tools or services provided by ABC LLC out fear that they will be on the hook to pay ABC LLC’s unpaid mineral contractors.
To prevent this potential degradation of business and harm on customer relationships which would have a negative effect on all parties to the estate in a Chapter 11 proceeding, ABC LLC should seek to proactively identify all mineral contractor vendors and request permission to pay them as part of the Mineral Contractors Motion to be filed as part of the First Day Motions in the bankruptcy court. ABC LLC along with their financial advisor should diligently review their vendor list to determine Mineral Contractors, review unpaid prepetition amounts, and estimate any un-billed prepetition amounts. By proactively identifying and seeking court permission to pay Mineral Contractors, ABC LLC can maintain business as usual during the bankruptcy proceedings and preserve value to the estate.