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Oil and gas operator bankruptcy

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HKA

A developer/operator of oil and gas wells fell into bankruptcy following a slump in the oil prices. The company’s investors, which included major US banks, sought to recover their investment amid concerns that the operating company had violated their joint operating agreement (JOA).

Brief

Our partner, an experienced forensic accountant and former audit partner of more than 25 years, was commissioned to investigate on behalf of investors and working-interest partners.

What we did

Following a close examination of the terms of the JOA, the investigation focused on the operator’s dealings with a series of related entities, including its management company and various other service providers.

Activities undertaken included:

  • Reviewing all relevant financial statements, records and supporting documentation
  • Tracking the flows of funds into and out of the operating company’s accounts
  • Assessing internal controls over payments to related entities, their adequacy and observance
  • Comparing what was reported to investors with internal reporting
  • Interviewing accounting staff and re-interviewing them in light of findings
  • Determining the point of insolvency and analyzing all subsequent payments
  • Evaluating various items of expenditure for reasonableness

This analysis found that the operating company had been insufficiently capitalized while continuing to expand and to trade despite its insolvency. This enabled the investors’ right to remove the operator under the JOA. 

More than $30 million of investors’ funds were misused in total, including:

  • Comingled joint and standalone operator funds 
  • Management and seismic survey fees paid after insolvency to the management company and traced to the owner’s bank account
  • Expenditure without the required approval of non-operating working interests, including the acquisition of mineral rights from homeowners that would never be viable

Outcomes

The investors submitted our partner’s report to the trustee of the court. Subject to its approval, they stand to recover a meaningful portion of their investment from the owner of the operating company, the sale of its assets, and its general partners and creditors. 

Project Details
  • Client
    Confidential
  • Year
    2017
  • Value
    US$20million
  • Services
    Forensic Accounting & Commercial Damages
  • Sectors
    Forensic Accounting & Commercial Damages

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