The capital-intensive nature of the upstream oil and gas sector, coupled with the recent and precipitous decline in commodity prices, has tightened financing markets for E&P companies and triggered a need for alternative sources of capital. At the same time, the credit profile of many independent E&P companies has become strained under substantial overleveraging. These distressed conditions provide opportunities for investors to develop creative solutions to satisfy E&P companies’ liquidity needs. One creative solution that has received considerable attention is the drilling participation arrangement, commonly referred to as the “DrillCo” structure.

“DrillCo” deals have historically been bespoke, limited only by the collective imagination of the parties. However, within the last six months, common themes have developed with respect to key structural elements. “DrillCo” deals typically involve a commitment by the investor to fund an agreed share of capital costs to drill and complete wells in exchange for an undivided interest in the portion of the leasehold acreage required to produce from those wells (namely, a “wellbore” interest). Besides funding its respective ownership interest of drilling costs, the investor is also often required to fund a portion of the E&P company’s share of drilling costs through a drilling “carry”.

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