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USA - Nationwide in USA

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USA - Nationwide Overview

Contributed by Vinson & Elkins LLP

Energy & Natural Resources 

Although oil prices continued to rebound in 2017, litigation activity in the energy sector remained steady, and we expect 2018 will be similar. Traditional lessor-lessee disputes remain prevalent, and the law in this area continues to develop, particularly in states that do not have well defined bodies of oil and gas law. In addition to royalty litigation, there has been an uptick in lawsuits over drainage, development, and surface use. Environmental and toxic tort litigation, on the other hand, appear to be on a downward trend going into 2018. In 2016, litigation concerning seismic activity and saltwater disposal wells garnered significant attention, particularly in Oklahoma. But in 2017, some of the closely watched cases in this area were dismissed, and others have not gained much traction.

Royalty litigation has been an active area for the past several years, and 2017 was no exception. Royalty owners continue to scrutinize the manner in which their royalties are calculated, questioning things like deductions, pricing, and allocation. The principles that govern these disputes are fairly established in states like Texas, but this area of the law continues to develop in states like Ohio and West Virginia. Royalty class actions are also evolving. Since 2012, producers have been successful in defeating class certification in a number of royalty cases. This success was largely due to key decisions from the U.S. Supreme Court construing the requirements of certification, including “commonality” and “predominance.” But plaintiffs’ lawyers have adapted to these decisions and are now pursuing claims that are more conducive to certification.

As development has remained stagnant due to low oil prices, lawsuits over drainage and development have increased. When oil prices were at their peak, E&P companies were developing at a much faster pace, which meant more wells and more royalties. Not only did low oil prices cause lessors to receive less per barrel, they also resulted in less production overall. This has caused lessors to question whether wells on adjacent properties are draining their lease and whether their lessee is developing at a pace that is reasonable and prudent. Claims of this nature are highly fact specific and generally turn on competing expert testimony.

Disputes between lessors and lessees regarding surface use have also increased, but this has less to do with low prices and more to do with the nature of horizontal drilling and the consolidation of production and marketing operations. To make their operations profitable, E&P companies have to build integrated facilities that service multiple properties. Lessors will often challenge these facilities as an impermissible burden on the surface estate and demand compensation. In areas like the Permian Basin, where the infrastructure continues to expand, these types of disputes will only increase.

With regard to energy-related transactions, acquisition and divestiture (A&D) activity over the past 12 months was strong, thanks in large part to a crude oil rebound that began in late 2016 and continued through much of 2017, and investments and divestitures by private equity firms. Several of the most active private equity firms in 2017 included Apollo Global Management ($900 million commitment to Chisholm Oil and Gas (with related acquisitions) and Double Eagle’s $2.8 billion sale to Parsley Energy); Blackstone Energy Partners (EagleClaw Midstream’s $2 billion acquisition from EnCap Flatrock and $1.57 billion investment in Energy Transfer Partner’s ET Rover Pipeline); Natural Gas Partners (Black Mountain Oil and Gas' $700 million sale to Marathon); TPG Capital (Jonah Energy’s $580 million acquisition from Linn); and Warburg Pincus (Brigham Resources' $2.43 billion sale to Diamondback).

Public E&P companies were also active, including Rice Energy’s $8.2 billion merger with EQT Corporation, which created the largest domestic natural gas producer in the U.S., and Plains All American's $1.22 billion acquisition from Concho Resources.

In 2017, capital markets opened up for oilfield services companies, which had not seen an initial public offering (IPO) since 2014. After the Keane Group priced its IPO in January of 2017, four other oilfield services companies followed suit in 2017.

Two other trends from 2017 that are expected to continue in 2018 are the surge in Special Purpose Acquisition Companies (“SPACs”) that are focused on energy opportunities, and strategic partnerships between upstream and midstream companies.

SPAC transactions in 2017 included Riverstone raising $1.035 billion in its IPO of Silver Run Acquisition Corporation II (which quickly “de-SPACed” with its acquisition of Alta Mesa Holdings and Kingfisher Midstream); Natural Gas Partners raising $552 million in its IPO of Vantage Energy Acquisition Corp.; and TPG Capital raising $650 million in its IPO of TPG Pace Energy Holdings Corp.

There were also a number of strategic partnerships between upstream and midstream companies in 2017, including MVP Holdings’ joint venture with Chisholm Oil & Gas and Double Eagle Energy Permian’s $2.8 billion sale of certain undeveloped acreage and producing oil and gas properties in the core of the Midland Basin to Parsley Energy.