With commodity pricing depressed and the coronavirus pandemic continuing to affect industry, many previously passive upstream creditor investors in oil and gas companies are finding their status suddenly changing.
Many oil and gas companies and their investors are looking at declaring bankruptcy, which creditors may think they’re ready for. But, they must take income tax considerations into account, says Lynn Loden, Managing Director at Opportune LLP.
“A lot of people will go, ‘Well, there’s just not going to be a tax problem with this. We’ll figure it out,’ because that’s not driving the bus, which is true. Tax shouldn’t drive the bus in bankruptcy,” Loden says. “But it can be a nasty little problem with the way that the bankruptcy code looks at tax during bankruptcy. Those costs can be bumped up to a priority ahead of some senior creditors if you trip a tax during the administration of the bankruptcy case. That’s where, to me, a lot of the risk is.”
For creditors, the form of the instrument they receive could bring along with it unexpected tax consequences, both immediate and long term.
These impacts arise from a lack of knowledge about specific regional regulations and tax-related information, such as oil and gas in places deemed real estate in the U.S. that set up foreign investors as landowners stateside, which can have sweeping tax consequences.
Loden said the biggest key is simply reaching out for help from a professional with experience in managing these types of oil and gas restructuring situations, such as the leadership at Opportune.
“If you’re a creditor that’s about to become a non-operating owner and the restructuring council is going to give you a partnership interest: Raise your hand quickly,” Loden says. “Because if you’ve never had one before, they’re different. There’s a lot of information and some of it complicates your compliance process and it could even bring your tax-exempt status into question.”
“If you're a creditor that's about to become a non-operating owner and the restructuring council is going to give you a partnership interest: raise your hand—quickly.”