I have a fairly “generic” mineral lease with Unit Petroleum in Grady County, OK for a producing well known as McConnell #1-11H in Sect 11-05N-08W. By “generic” I mean that the lease was not heavily negotiated.
Today I received a bankruptcy notice for Unit Petrolum Company (as well as other Unit entities such as Unit Corporation, Unit Drilling, etc).
My question: where does the lessor stand in the order of priority between secured debt and equity? Are we pari passu with the secured lenders? With the unsecured creditors? Or somewhere in between?
Also, I presume that lease payments will be suspended until a reorganization is agreed to. What is likely to happen to any royalties which might accrue during this period of reorganization?
I realize that a specific answer would require more information than I have provided here; a general answer would be fine.
Here’s part of a blog post by attorney Wade Caldwell that deals with your question.
The link below it should take you to his full article.
How Does This Affect my Royalties?
Because Texas royalty owners may have a secured claim to sales proceeds, and because of the possibility of terminating the lease if it is worded properly, the effect on royalty payments is often not as large as many would fear. Particularly in a Chapter 11, the operator usually quickly gets permission from the court to continue to pay royalty owners during the bankruptcy. However, there is no one-size-fits-all outcome on royalty payments, and it can vary from a complete stop of payments, if they have not stopped already, to proportional payments, to full payments. The payment for any royalties overdue at the time the bankruptcy is filed are considered claims against the bankruptcy estate, and may take a substantial amount of time to collect, if at all. If your operator has stopped paying royalties and eventually files a voluntary Chapter 7, your chance of getting 100 cents on the dollar is poor.
In Oklahoma, you won’t have to do anything. The royalties are secure and are not a part of the equity or debt owned by Unit (Debtor). You should continue to get paid on your regular basis.