Lexis Practice Guide Oil And Gas Industry (Pacey, Hoffman)

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and dra your work product in 14 dierent pracce areas.

Mahew R. Pacey Jusn F. Homan

Oil and Gas Industry Pracce Guide

by Mahew R. Pacey, P.C., Jusn F. Homan, Michael W. Rigdon, and Christopher J. Fox, Kirkland & Ellis LLP

Overview

Queson 1: Please describe the oil and gas industry and briey discuss various types of companies and major players.

The energy industry is broadly separated into three main sectors:

• Upstream

• Midstream

• Downstream

The upstream sector, also known as the exploraon and producon sector, deals with the search for crude oil and natural gas elds

and the subsequent drilling and operaons required to recover crude oil and natural gas and bring it to the surface.

The midstream sector generally includes the transportaon of oil and gas products, processing of such products, and the storage and

markeng of those products.

The downstream sector refers to the rening of petroleum crude oil and the processing and purifying of raw natural gas, including the

removal and producon of sulfur, petrochemicals, and certain natural gas liquids as nal end-products.

It should be noted, however, that the midstream sector is oen dened to include certain elements of the downstream sector, such

as natural gas processing in preparaon for transportaon and/or wholesale markeng. Addionally, downstream operaons deal

with the markeng and distribuon of products derived from crude oil and natural gas that can include a variety of fuels, industrial

products, and petrochemicals.

Beyond the upstream, midstream, and downstream sectors, the oil and gas industry also includes oileld services companies that

tradionally do not produce, transport, or rene petroleum themselves, but provide a number of crucial products and services for

drilling, evaluaon, compleon, and producon of oil and natural gas wells as well as oen assist in pipeline construcon.

The largest oil and gas companies in the world, oen referred to as supermajors, include BP plc, Chevron Corporaon, Exxon Mobil

Corporaon, Royal Dutch Shell plc, Total SA, and Eni. Certain state-owned oil and gas companies (such as China’s CNPC and Sinopec

or Saudi Arabia’s Saudi Aramco) operate on a similar scale and generate similar revenues to the supermajors. The industry is also

host to a number of smaller independent companies that operate within the upstream, midstream, or downstream operaons or

oileld services segments, such as Anadarko Petroleum, Schlumberger, Hess Corporaon, and many others. The emergence of U.S.

shale producon has turned many independent operators into larger players in the industry, and recently many of the supermajors,

such as Exxon Mobil and Chevron, have shied more of their capital budgets away from oshore oil and gas producon towards U.S.

shale plays.

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Applicable Securies Laws and Regulaons

Queson 2: What are the relevant statutes and regulaons governing securies oerings by oil and gas companies?

In addion to the statutes and regulaons governing securies oerings generally (such as Secon 5 (15 U.S.C.S. § 77e) of the

Securies Act of 1933, as amended (the Securies Act), the excepons from registraon thereunder such as Secon 4 (15 U.S.C.S.

§ 77d), Regulaon S (17 C.F.R. § 230.901- § 230.905), and Regulaon D (17 C.F.R. § 230.500 - § 230.508) promulgated under the

Securies Act, and the majority of the rules included in Regulaon S-K (17 C.F.R. § 229.10 - § 229.1208) and Regulaon S-X (17

C.F.R. § 210.1-01 - § 210.12-29)), there are statutes and regulaons that apply solely to oerings by oil and gas companies. For

further informaon on the securies laws in general, see U.S. Securies Laws: An Overview. For further informaon on exempons

from registraon, see Secon 4 Exempons from Securies Act Registraon Checklist, Regulaon S Oering Representaons and

Covenants, and Knowing the Components of Regulaon D.

For example, Subpart 1200 (17 C.F.R. §§ 229.12011208) of Regulaon S-K mandates certain disclosure by registrants engaged in oil

and gas producing acvies and requires the inclusion of summary reserve reports, as more fully described in Queson 4(B) below.

Addionally, there are specic accounng rules that apply to the treatment of exploraon acvity costs. Costs associated with oil

and gas drilling acvies can either be accounted for on a company’s nancial statements based on the successful eorts or full cost

methods. The choice of which method to ulize will govern whether certain costs will be capitalized and when such costs will be

expensed. For a more detailed descripon of these accounng treatments, see Queson 4(C) below.

Furthermore, midstream and pipeline companies that transport oil and gas interstate are subject to the Federal Energy Regulatory

Commission (FERC), which regulates the transmission and wholesale sale of electricity and natural gas in interstate commerce as well

as the interstate pipeline transportaon of oil. FERC must approve any proposals to build interstate natural gas pipelines, natural

gas projects, and liqueed natural gas terminals, although the agency primarily focuses on rates and access to pipelines and state

regulaons generally govern route approval for pipeline construcon.

Lastly, there are also numerous federal and state environmental laws governing an oil and gas company, and any material eects that

compliance with such laws may have on the company need to be disclosed in the securies oering document. In addion, Item 103

(17 C.F.R. § 229.103) of Regulaon S-K requires disclosure of any administrave or judicial proceeding arising under a federal, state, or

local provision governing the discharge of materials into the environment or protecng the environment, if such proceeding involves

a governmental authority and potenal monetary sancons of $100,000 or more. Regulaon S-K also requires, under Item 101 (17

C.F.R. § 229.101), that companies disclose material environmental capital expenditures for the current and succeeding scal year and

any addional years that are material.

Securies Oering Process

Queson 3: What is the typical process for securies oerings by oil and gas companies, including general steps, meline, key

transacon documents, due diligence process and required regulatory and stock exchange lings?

The oil and gas industry is extremely capital intensive, and companies oen need to access the capital markets to fund their drilling

programs and working capital needs. The general steps and meline of a securies oering for oil and gas companies is similar in

many respects to the process experienced by companies in other industries when they issue securies. The key pares include the

company who plans to issue the securies, the underwriter (or inial purchaser in a Rule 144A (17 C.F.R. § 230.144a) oering or the

placement or exchange agent in a direct private placement) who will market the sale, securies counsel for the company issuing the

securies, and securies counsel for the underwriter. For further informaon, see Pares to a Securies Oering Checklist. For further

informaon on Rule 144A oerings, see Understanding the Requirements of Rule 144A and Regulaon S. The company’s independent

public accounng rm will also play a key role in the oering by providing the underwriters or inial purchasers with a comfort leer

with respect to the nancial informaon contained in the oering document. The accounng rm will also assist with answering

certain audit or nancial related diligence quesons. See Conducng Accounng Due Diligence: Purpose and Process. One disncon

in securies oerings for oil and gas companies is that, if the oering is by an exploraon and producon company, a reserve engineer

will also be involved in the oering. The reserve engineer in essence is the auditor of the exploraon and producon company’s oil

and gas reserves, which are nancial assets that the company’s independent public accountant does not have the experse to audit.

The reserve engineer will assist in the diligence process by answering the underwriters’ or underwriter counsel’s quesons with

respect to reserve data and will also provide an opinion with respect to reserve esmates included in the oering document.

Although securies oerings by oil and gas companies generally follow the same structure and process as typical securies oerings

for most of the key transacon documents, there are nuances that a praconer should know when advising a client on such an

oering, as noted below.

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For further informaon on securies oerings in general, see Inial Public Oerings Resource Kit, Follow-On Oerings Resource Kit,

and Private Placements Resource Kit.

Underwring Agreement

The underwring agreement in a securies oering by an issuer engaged in the oil and gas business follows the same form as a typical

underwring agreement. Certain representaons and warranes are slightly more robust, and there may be addional deliverables.

For example, counsel will focus heavily on the environmental representaons and warranes and the tle representaons and

warranes, both with respect to the clear ownership of reserves and certain right-of-way rights for pipelines. Addionally, similar to

obtaining a comfort leer from the issuer’s independent auditor, underwriters will require an exploraon and producon company

to obtain a leer from its external reserves engineer providing comfort on specied oil and gas reserves informaon that is included

in the oering document. This is referred to as a reserves engineer leer or a reserve report conrmaon leer and is an especially

important part of the diligence/comfort process in an oering by an issuer engaged in the exploraon and producon business. For

addional informaon regarding the underwring agreement in securies oerings by oil and gas issuers, see Queson 5 below. For

further informaon on underwring agreements, see Understanding the Key Agreements in an IPO — Underwring Agreement. For

forms of underwring agreements in various other contexts, see Underwring Agreement, Agreement Among Underwriters (IPO),

and Underwring Agreement (Combined Primary and Secondary Oering).

Due Diligence Process

The diligence process in securies oerings by oil and gas companies is dierent from other securies oerings because of the

numerous disclosures beyond nancial informaon that drive the price of the securies to be sold in the oering. For exploraon

and producon companies, diligence includes a thorough review of backup and supporng informaon for oil and gas reserves,

related operaonal informaon, acreage data, and producon numbers disclosed in the oering document. A praconer should

review not only the company’s external and internal reserve reports, but also the lease and tle informaon for the mineral rights

associated with the issuer’s reserves, especially with respect to secured nancings. Firms that have an extensive pracce represenng

oil and gas companies will typically have a specialist knowledgeable of oil and gas leases and contracts governing mineral rights

(also known as a landman) in-house that can assist with this diligence. For midstream companies, it is important to diligence any

right-of-way or pipeline perming issues and engage specialists versed in FERC rules and regulaons for certain regulatory maers

when appropriate. Environmental specialists should always be involved and thoroughly review any potenal or past environmental

violaons, proceedings, or capital expenditures that may warrant disclosure in the oering document. For addional informaon on

oil and gas company due diligence, see Management Due Diligence Quesons for an Energy Producer. For addional informaon on

due diligence in securies oerings in general, see Due Diligence for Securies Oerings Resource Kit. Due Diligence Interviews, and

Management Due Diligence Quesons.

Investor Presentaon

Disclosure in the investor presentaon for securies oerings by oil and gas companies is oen more extensive and forward-looking

than typical securies oerings. In parcular, issuers will want to include specic informaon and charts related to their producon

prole, including type curves (which show forecasted producon quanes and expected declines in producon from a well over

me) and addional reserves data that does not conform to Securies and Exchange Commission (SEC) rules for reserves. The

addional reserve informaon may include reserve numbers based on the pricing of futures contracts (such as prices listed on the

New York Mercanle Exchange, or NYMEX, and commonly referred to as “strip pricing”) versus SEC pricing. There is also no rule

analogous to Regulaon G (17 C.F.R. § 244.100 - § 244.102) for nancial informaon that would require presenng and reconciling

this non-conforming data to a prescribed conforming number or gure. Addionally, it is more common for oil and gas issuers to

provide guidance in the investor presentaon for items such as planned capital expenditures and certain expense numbers. Despite

the general advice of securies praconers to avoid guidance in both oering documents and accompanying presentaons, oil and

gas issuers regularly include addional operaonal guidance, such as producon forecasts, in the investor presentaon, especially

when a transformave acquision, divesture, or other event has changed the company’s prior projecons. As with any securies

oering, counsel should explain the risks of including such informaon in oering materials and in most situaons, advise the client

to remove such guidance from the investor presentaon. If the client insists on including it, counsel should generally recommend a

separate diligence call with management and reserve engineers and add such informaon to the oering document itself. For further

informaon regarding investor presentaons, see Preparing for a Road Show.

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Debt Covenants

There are numerous dierences in debt securies oerings by oil and gas issuers, specically within the covenants in their indentures.

While an analysis of these dierences would require an arcle of its own, a few of the dierences include:

• A credit facility basket sized by reference to (x) a borrowing base concept ed to the reserve-based credit agreement, (y) a

percentage of “Adjusted Consolidated Net Tangible Assets,” and/or (z) a dollar amount

• Various non-indebtedness lien excepons for ordinary course business acvies

• A broad concept of “Permied Business Investments” perming various joint venture and joint development acvies which

are customary in the industry

• A more onerous test for the incurrence of unsecured debt under a xed charge coverage rao of 2.25 to 1 (instead of the

typical 2.0 to 1)

• For secured deals, a mortgage covenant that oen requires the delivery of an ocers’ cercate cerfying compliance with a

minimum collateral coverage requirement based on proved reserves (typically 85-90%)

For addional informaon on debt covenants, see Covenants: High Yield vs. Investment Grade. For a form of indenture including

covenants, see Indenture.

Disclosure Obligaons

Queson 4: What informaon must be made available to potenal investors in connecon with securies oerings by oil and gas

companies?

A. Risk Factors

Please describe the common risk factors that are specic or unique to issuers in this industry. Have there been any recent

developments or changes that counsel should be aware of when preparing these risk factors?

There are numerous risk factors that are unique to the oil and gas industry and a praconer should carefully review this secon of

the oering document in order to tailor an issuer’s risk factors to meet the specic risks of the client’s business. Certain key risks are

noted below. For addional informaon on risk factors in general, see How to Dra Risk Factors for a Registraon Statement and

Market Trends: Risk Factors.

• Risk related to the development of undeveloped reserves or PUDs. Risks related to the ability to drill and produce proved

undeveloped reserves, or PUDs, should be fully disclosed. For example, SEC rules require that an issuer’s capital program

provide for the drilling and compleon of PUDs within ve years of booking the PUD. In low price environments, oil and gas

companies will oen have to reduce their capital spending and as a result, the amount of PUDs can signicantly decrease.

Furthermore, there is no guarantee undeveloped reserves will be developed and this should be adequately disclosed. As

reserves are a declining asset, oil and gas companies must connue to produce resources from exisng properes and/or

acquire producing properes in order to remain viable.

• Impairments to the carrying values of oil and natural gas properes. The oering document should also include risk factors

related to the potenal impairment of oil and gas reserves and the write-down of the carrying values of the registrant’s oil

and natural gas properes should be included. As described under Queson 4(C), if the carrying value of oil and natural gas

properes for a company exceeds the present value of such reserves, the company will be required to take a write-down to

the carrying value of such reserves reected as assets on the company’s balance sheet. This is especially true with companies

that ulize the full cost method of accounng which requires a quarterly ceiling test to determine if impairment is necessary.

The company’s internal auditors and outside auditors should be consulted to determine if impairments are expected. If

impairments are expected, a praconer should add addional detail regarding any expected decrease in the carrying values

of oil and natural gas properes and disclose the implicaons of any such decrease, including any potenal reducons in a

credit facility borrowing base or other adverse liquidity consequences.

• Volality of oil and natural gas prices. Oil and gas companies should include a risk factor to address the volality of commodity

prices and the risk of cash ow volality if hedges are not replaced. The risks related to the company’s commodity hedging

program should also be fully addressed.

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• Assumpons in determining the value of oil and gas reserves. A risk factor should address the assumpons that are used

in esmang the value of oil and gas reserves and the risk that those assumpons will materially aect the quanes and

esmated present value of reserves.

• Liquidity risks, including the risk of a borrowing base reducon under the credit facility. Due to the volality in oil and gas

prices, liquidity risk may be a realisc threat to an oil and gas company and should be appropriately disclosed. For example, a

decrease in the value of oil and gas reserves, potenally driven by a decrease in commodity prices, may result in a subsequent

borrowing base reducon for the registrant’s credit facility. A borrowing base reducon will result in less liquidity for the

company and also may trigger deciency payments if the borrowing base is reduced below the amount borrowed under

the facility. This risk is related to the potenal for impairments noted above. If the company has experienced a signicant

impairment or expects one to occur, a praconer should carefully analyze and disclose the likelihood of a borrowing base

reducon under the company’s credit facility.

• Risks related to the implementaon of new technology. Technology related to oil and gas drilling and fracturing acvies

changes quickly. If a company does not appropriately adopt these new technologies, their compeve posion may decline.

This risk is especially important for energy services companies that must employ the latest in technology to remain compeve

and maintain market share.

• Regulatory risks. The oil and gas industry is subject to extensive regulaons, including environmental regulaons related to

the handling and disposal of hazardous materials, wastewater discharges, air emissions, and endangered species, among

others. The appropriate specialists should be engaged to ensure all regulatory risks are addressed.

• Concentraon of suppliers and customers, and geographic concentraon of operaons. In the oil and gas industry it is not

uncommon for a company’s suppliers or customers to be somewhat concentrated. Where this is the case, the company should

disclose that it is highly dependent on a few suppliers or customers and discuss the accompanying risks. Addionally, risks

associated with any geographic concentraon of operaons should be disclosed.

B. MD&A and Business

Please provide the key discussion points that counsel should consider when preparing the business and MD&A secons for issuers

in this industry.

Counsel should consider including a number of addional disclosures in the Business and Management’s Disclosure and Analysis

(MD&A) secons for clients in the oil and gas industry.

For issuers engaged in oil and gas producing acvies, Subpart 1200 of Regulaon S-K requires, among other things:

• Addional disclosure regarding proved developed and undeveloped oil and gas reserves

• Inclusion of a third-party reserve report in certain instances

• Disclosure of producon, prices, and costs

• Disclosure of producve and dry exploratory and development wells, delivery commitments, and certain acreage informaon

The SEC typically will focus on compliance with Subpart 1200 when reviewing and issuing comment leers to oil and gas issuers,

whether with respect to an inial public oering registraon statement, shelf registraon statement, or periodic disclosure under the

Securies Exchange Act of 1934. Counsel should survey recent SEC comment leers that address Subpart 1200 of Regulaon S-K to

ensure their client’s disclosure (especially in connecon with an inial public oering) appropriately addresses posions taken in any

recent SEC comments. Addionally, issuers engaged in exploraon and producon acvies will typically disclose producon data

and pricing data in MD&A, as well as certain more detailed expense informaon on a per unit of producon basis, including items

such as lease operang expense, impairments, gathering and transportaon expenses, and depreciaon.

An item that has received a renewed focus by the SEC in the current lower oil and gas price environment is disclosure of PUDs. The

SEC has frequently issued comments with respect to an issuer’s disclosure of PUDs and specically with respect to how such issuer’s

development plan provides for the development of PUDs within ve years of booking, known as the ve-year rule. In a low oil and gas

price environment, especially with many oil and gas companies facing liquidity constraints, the ve-year rule for booking PUDs oen

results in a somewhat signicant reducon in the amount of PUDs disclosed as companies no longer have the necessary liquidity to

drill or it is less economic to drill at the same rate as in higher price environments. Recently due to the low-price environment, some

issuers have been required to remove disclosure of PUDs altogether due to signicant reducons in their capital spending plan.

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Issuers engaged in midstream acvies will oen break down revenues disclosed in MD&A into various segments such as transportaon

services, sales of oil and gas from markeng acvies, and processing. For companies in the midstream business that focus their

operaons on transportaon services, it is common to also include disclosure of throughput volumes in MD&A.

Issuers in the oil and gas industry will typically include disclosure regarding gains or losses with respect to their commodity derivave

contracts and disclosure regarding environmental and other regulatory maers. Commodity derivave contracts can have signicant

value for an oil and gas company, especially when prices are volale, and the company’s use of such contracts to smooth revenues

and hedge against risk should be appropriately disclosed in MD&A.

Environmental and regulatory disclosure has become increasingly important for oil and gas companies. For example, with the

heightened focus on fracking and increased earthquake acvity in certain areas, disclosure in the business secon and in the risk

factors should include detail regarding any restraints or potenal restraints to operaons that the issuer believes could be imposed

upon it by federal and state regulatory bodies.

C. Other Prospectus Disclosure

Is there any other addional or special disclosure that should be included in the prospectus or registraon statement for issuers in

this industry, either required by the SEC or from market pracce?

Rule 4-10 (17 C.F.R. § 410.4-10) of Regulaon S-X governs nancial accounng and reporng for oil and gas producing acvies and

also contains many of the denions for certain oil and gas related terms that are used in disclosure and throughout the SEC’s rules and

regulaons. Specically, Rule 4-10 provides the denions for proved oil and gas reserves, probable reserves, and possible reserves,

among others. Proved reserves are dened as those quanes of oil and gas reserves which can be esmated with reasonable

certainty to be economically producible. In calculang proved reserves, the SEC spulates that the pricing mechanism that should

be used is the average price during the 12-month period prior to the report, determined as an un-weighted arithmec average of

the rst-day-of-the-month price for each month within such period (SEC Pricing). Probable reserves are those reserves that, together

with proved reserves, are as likely as not to be recovered. Possible reserves are those addional reserves that are less certain to be

recovered than probable reserves. Although the SEC prescribes the use of SEC Pricing in disclosure/oering documents led with

the SEC, companies will oen vary from SEC Pricing in lender calculaons and Adjusted Consolidated Net Tangible Assets (ACNTA)

calculaons and use NYMEX strip pricing.

Addionally, there are specic accounng rules that apply to capitalizing or expensing certain costs of oil and gas exploraon and

producon companies. Costs associated with oil and gas drilling acvies can either be recorded on a company’s nancial statements

based on the successful eorts or full cost methods. Companies who choose to use the successful eorts method expense the cost

of drilling dry holes, or unsuccessful drilling eorts, as such costs are incurred, whereas companies ulizing the full cost method will

capitalize all such costs, including costs of unsuccessful drilling eorts, in the carrying value of their oil and gas properes on their

balance sheet to be expensed later through the recognion of depreciaon expense. Both methods require the periodic impairment

of oil and gas properes if the balance sheet value exceeds the present value of such reserves; however, it is more common to have

impairment recognion when the full cost method is employed due to the oen higher relave carrying value of oil and gas properes

as a result of the capitalizaon of certain unsuccessful drilling and other costs as menoned above. Addionally, companies who

ulize the full cost method will perform a quarterly ceiling test to determine if any impairment is necessary, whereas companies who

ulize the successful eorts method will typically perform a test for impairments annually. Issuers should include detailed disclosure

regarding their use of the successful eorts or full cost methods, as the choice of which method to use can substanally change how

the value of reserves are presented in the issuer’s nancial statements. The company’s auditors will focus heavily on this disclosure as

well. The rules that govern the use of the successful eorts method and full cost method can be found in Rule 4-10(b) of Regulaon

S-X.

An important addional disclosure point for oil and gas companies that stems from the comparability of nancial metrics for

companies that ulize the successful eorts method versus the full cost method is the comparability of earnings before interest,

taxes, depreciaon, and amorzaon (EBITDA). As a result of full cost companies capitalizing a larger amount of costs and depreciang

those costs over me, as opposed to successful eorts companies expensing unsuccessful drilling costs as incurred, the add-back of

depreciaon in EBITDA, as well as the lower expense gure for full cost companies, oen results in a dierent EBITDA number for

full cost companies. To adjust for this discrepancy, many successful eorts companies will employ EBITDAX to add back exploraon

expense.

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D. Addional Disclosure Issues

Please discuss any other special disclosure issues or advice applicable to issuers in this industry.

For purposes of acquired business nancial statements required by Rule 3-05 (17 C.F.R. § 210.3A-05) of Regulaon S-X, the Division of

Corporaon Finance’s Financial Reporng Manual recognizes a working interest in an oil and gas property as a business. See Secon

2010.4 of the Financial Reporng Manual, which can be found at hps://www.sec.gov/divisions/corpn/cnancialreporngmanual.

shtml. As a result, acquisions of oil and gas interests should be analyzed to determine if any of the signicance thresholds of

Regulaon S-X are exceeded and whether acquision nancials will be required to be led with the SEC. Addionally, Secons 2065.11

and 2065.12 of the Division of Corporaon Finance’s Financial Reporng Manual permit the use of short-form nancial statement

requirements for acquisions of oil and gas interests if certain condions are met. However, it is important to note this reduced

nancial statement requirement does not apply outside of the Regulaon S-X 3-05 context. Therefore, in the context of a securies

oering where the acquired business represents the predecessor of the registrant, this guidance would not apply, and an issuer would

be required to prepare an audit for the acquired properes.

There are also addional disclosure consideraons when conducng a securies oering of a master limited partnership (MLP). An

MLP is a limited partnership or limited liability company that issues units, as opposed to shares of stock, represenng ownership

interests in the underlying limited partnership or limited liability company. MLPs are tax pass-through enes and subject to a few

excepons, do not pay any federal income taxes at the enty level. See Taxaon of Publicly Traded Partnerships. Unitholders of the

MLP will receive regular distribuons from the MLP, and such distribuons will be subject to tax at such unitholder’s individual tax

rate. Given the complex structure governing distribuons and also the unique governance rights in an MLP, registrants should provide

fulsome disclosure regarding the partnership agreement, how cash distribuons are made, and the governance structure, including

addional disclosure on potenal conicts of interest between the MLP and the sponsor. MLP registraon statements for inial public

oerings will also include nancial informaon which reects cash available for distribuon on a go forward basis and on a historical

basis pro forma for the oering, commonly referred to as the forecast and back-cast. Addionally, unlike corporate issuers engaged in

oil and gas operaons, certain oerings by limited partnerships are not required to comply with SEC Industry Guide 2.

Underwring Agreements

Queson 5: What types of underwring arrangements are commonly used? What are some of the standard clauses and clauses

that are heavily negoated in an underwring agreement in connecon with an oering by an oil and gas company?

When conducng a securies oering by an oil and gas issuer, a praconer will start with the standard bank form of underwring

agreement that is used for energy and non-energy deals. For oerings that are by partnerships such as MLPs, many banks will have

a separate MLP form of underwring agreement that will be used for the transacon. Praconers should check with the bank’s in-

house legal counsel to determine the preferred form to use.

A praconer should tailor certain of the representaons and warranes to the specic asset prole of the issuer. For instance, in an

oering by an exploraon and producon company, legal counsel should revise the typical tle and environmental representaons

to appropriately address the value and nuanced risk associated with owning oil and gas reserves and pulling such reserves out of

the ground. In oerings by a midstream company, legal counsel should also focus carefully on these representaons and warranes,

especially with respect to clear ownership of certain right-of-way rights for pipelines.

Addionally, similar to obtaining a comfort leer from the issuer’s independent auditor, an exploraon and producon company will

agree in the underwring agreement to obtain a leer from its external reserves engineer providing comfort on certain oil and gas

reserves informaon that is included in the oering document.

The addional focus on these representaons and warranes and the inclusion of the reserves engineer leer requirement would

apply in both private and public debt and equity oerings.

Connuous Disclosure and Corporate Governance

Queson 6: What specic connuous disclosure and corporate governance requirements apply to oil and gas companies?

Generally, the same SEC and stock exchange corporate governance requirements apply to oil and gas companies as would apply to

other companies. However, as discussed in Queson 7 below, there are relaxed requirements under the applicable exchange’s rules

for limited partnerships, such as MLPs.

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With respect to connuous disclosure obligaons, the major dierence is the requirement for oil and gas companies to comply with

Subpart 1200 of Regulaon S-K as further described in Queson 4(B).

For further informaon on connuous disclosure and corporate governance in general, see Periodic and Current Reporng Resource

Kit, Financial Statements and Reporng Resource Kit, Audit Commiee Resource Kit, and Proxy Statement and Annual Meeng

Resource Kit.

Stock Exchange Requirements

Queson 7: Are there any special lisng or corporate governance standards required by major stock exchanges, including NYSE

and NASDAQ?

Stock exchange rules, including for the New York Stock Exchange (the NYSE) and the NASDAQ Stock Market (NASDAQ), and SEC rules

and regulaons that govern lisng and corporate governance standards apply equally to oil and gas companies and do not dier in

any material fashion for issuers engaged in the oil and gas industry. As menoned above in Queson 6, however, there are relaxed

requirements for limited partnerships which would apply to oil and gas MLPs. For instance, unlike public corporaons, MLPs are not

required to have a majority of independent directors and are excused from needing a compensaon commiee and a nominang and

corporate governance commiee. Addionally, MLPs are exempt from the majority of the shareholder approval rules of the NYSE and

NASDAQ. For further informaon on NYSE and NASDAQ requirements, see Complying with NYSE and Nasdaq Lisng Requirements,

NYSE Corporate Governance Lisng Requirements Table, and NASDAQ Corporate Governance Lisng Requirements Table.

Other Key Laws and Regulaons

Queson 8: What are other key laws and regulaons that a securies lawyer working with an oil and gas company needs to be

aware of?

Many oil and gas companies in conducng their inial public oering (IPO) will qualify as an emerging growth company, or an EGC, and

as a result, will be able to benet from reduced disclosure requirements. An issuer that qualies for EGC status will retain that status

unl the earlier of (i) the end of the scal year in which its annual revenues exceed $1.07 billion, (ii) the end of the scal year in which

the h anniversary of its IPO occurs, (iii) the me at which on a three-year rolling basis the issuer has issued over $1 billion of non-

converble debt, and (iv) the date the issuer is a large accelerated ler. If a company qualies as an EGC, it is allowed to present only

two years of audited nancials in its inial public oering registraon statement instead of three years, including the accompanying

discussion of nancial periods in MD&A, and provide reduced compensaon disclosure similar to the disclosure requirement for a

smaller reporng company. Addionally, an EGC can inially submit an IPO registraon statement condenally with the SEC, test the

waters before proceeding with an oering, and avail itself of numerous other permissions. For addional informaon on EGCs, see

Emerging Growth Company Pracce Guide.

There are numerous environmental rules and regulaons at both the federal and state level that a securies lawyer should be aware

of when represenng a client in the oil and gas industry. These rules and regulaons are oen detailed and require a high degree of

specializaon. As a result, a securies lawyer should involve their rm’s environmental specialist to review and analyze an issuer’s

compliance with and liabilies under environmental rules and regulaons.

Addionally, a securies lawyer involved with an oering by a company engaged in the midstream business should carefully consider

any FERC rules or regulaons that might apply to an issuer engaged in the interstate transportaon of oil and gas. It is not uncommon

for a securies lawyer to engage a FERC specialist, whether in their rm or at a third party, to assist with this diligence and review.

Furthermore, tax specialists should be engaged to review tax disclosure and properly diligence any tax items with the company. This

is especially true for MLPs, and a tax specialist versed in partnership tax should be involved.

Regulatory Trends

Queson 9: What are the major regulatory trends aecng oil and gas companies?

When it comes to regulatory trends in the energy industry, no two areas of interest have drawn more aenon in recent years than

hydraulic fracturing and climate change. With respect to hydraulic fracturing, or fracking, the U.S. government and various states and

local governments have begun moving towards regulang, and in some cases restricng, fracking acvity. One of the more prominent

trends at the state regulatory level has been the movement to require oil and gas companies to publicly disclose the chemicals used

in hydraulic fracturing uids. Several states (including Wyoming, Arkansas, Michigan, Texas, West Virginia, and Montana, to name

Praccal guidance at Lexis Pracce Advisor ®

a few) have passed disclosure laws for the chemicals in these uids. Addionally, given increased earthquake acvity near certain

waste water disposal sites for fracking uid, some states, such as Oklahoma, have begun to regulate and limit disposal acvity in

certain areas that are seeing increased seismic acvity. The shi to more unconvenonal drilling techniques connues to create new

regulatory and environmental issues as laws adapt to the new drilling environment. Furthermore, the polical landscape oen can

play an important role in the regulaons that will be implemented to address these issues.

On the issue of climate change, the U.S. Environmental Protecon Agency (EPA) has focused on regulang methane emissions in

the oil and gas sector. In May 2016, the U.S. EPA issued new emissions standards that aim to reduce methane and other emissions

from new or modied oil and gas sources, whether through capturing emissions from compressors and pneumac pumps or through

requiring periodic surveys to idenfy any other fugive emissions sources.

There has, however, been a trend toward deregulaon in the oil and gas industry. In March 2017, the Trump administraon issued

an execuve order with the goal of rolling back certain aspects of various Obama-era environmental regulaons, including the Clean

Power Plan and Climate Acon Plan, both policies aimed at reducing carbon and methane emissions. Currently, implementaon of

the Clean Power Plan, which limits carbon polluon from power plants to a level set by state governments within certain parameters,

has been stayed by the U.S. Supreme Court pending a challenge in the U.S. Court of Appeals for the District of Columbia Circuit. In

addion, the U.S. House of Representaves seems to be of the same mind as the administraon. In early February 2017, the House

voted to eliminate rules promulgated by the Bureau of Land Management (BLM) reducing methane emissions from venng, aring,

and leaks during oil and gas operaons using the Congressional Review Act (the CRA). The CRA requires majority approval of the

Senate and the approval of the President to ocially repeal these BLM methane rules, but, if such approvals are received, the BLM

would be prohibited from issuing similar rules without express authorizaon from Congress.

Addionally, in 2010, the SEC provided interpretave guidance that is intended to remind companies of their obligaons under exisng

federal securies laws and regulaons to consider climate change and its consequences as issuers prepare disclosure documents.

In April 2016, the SEC sought comments on expanding climate change and other environmental, social and governance disclosure

requirements.

Commercial Trends

Queson 10: What are the major commercial trends aecng oil and gas companies?

The precipitous drop in oil prices in late 2014 has highlighted one of the most persistent trends in the oil and gas industry: Price

volality. Because oil and gas prices are linked to a number of geopolical issues outside the business purview, they are oen

unpredictable. Since late 2014, the market has been glued with oil and gas supply, and the prices have remained low, prompng

many oil and gas companies to avoid capital intensive projects. Addionally, the low price of crude oil and relave unpredictability of

the market has led a number of oil and gas companies to either pay less to their suppliers or delay payment, creang a problem for

certain companies.

Also, inially as the price of crude oil dropped, the nature of deals happening in the capital market space shied. IPO acvity and

tradional new money unsecured bond deals slowed, and companies turned to alternave sources of cash for liquidity. These

alternave sources of cash included debt exchanges, secured bond deals, instuonal term loans, private investment in public

equies, or PIPEs, and signicant involvement by private equity investors. For addional informaon on some of these alternave

sources of cash, see U.S. Securies Laws Applicable to Debt Exchange Oers and Cash Tender Oers Chart, Pricing and Closing an

Issue of Bonds, Market Trends: PIPEs, and Dodd-Frank and Private Equity—Then and Now. There was also an increase in both in- and

out-of-court restructuring transacons and such acvity may connue for some companies as they are forced to deal with upcoming

maturies and liquidity concerns. In such situaons, there are numerous securies issues which must be addressed, including

selecve disclosure, oering exempon concerns, consent solicitaon issues, covenant compliance concerns, and governance rights.

As the price of crude oil has begun to stabilize and increase, we have seen an increase in IPO planning and acvity which we expect

to connue.

Furthermore, over the last ten years the increased use of unconvenonal drilling techniques, such as horizontal drilling, has resulted

in a shi in the equipment and services needed to complete a well. As this shi connues, the equipment and services needed in this

industry become more complex, which creates demand for complex product oerings by energy services companies.

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Pracce Tips

Queson 11: What pracce points can you give to lawyers working with oil and gas companies?

The market precedent and pracce in the oil and gas industry can be unique and varied from the capital markets tradionally seen in

other industries in many ways. The oil and gas industry has over the years developed its own market terms and acceptable covenants

and structures for deals. The cyclical nature of the industry also impacts the types of transacons and structures ulized at any given

me. A praconer should keep this in mind when represenng oil and gas companies, as the uniqueness of the oil and gas market

is generally accepted and understood within that market. Addionally, a basic understanding of the fundamentals of the oil and gas

industry, such as basic geology, drilling techniques, reserve classicaons, and other industry-specic items, is very important in

eecvely represenng an issuer in the oil and gas space. One should talk to an experienced counsel that has a strong oil and gas

pracce when approaching a securies oering by an oil and gas company.

Lexis Practice Guide Oil And Gas Industry (Pacey, Hoffman)

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