Receiving news that your operator filed for bankruptcy is unsettling. You wonder if your royalty checks will stop, if your lease is still valid, and whether someone will take over the wells. Here's what typically happens.

Your Minerals Are Still Yours

Bankruptcy doesn't affect your mineral ownership. You own the minerals regardless of what happens to the company operating on them. The lease is a contract between you and the operator, and the minerals are your property. Even in the worst case, your ownership is not at risk.

What Happens to Your Lease

Oil and gas leases may be treated as executory contracts in bankruptcy under Section 365 of the Bankruptcy Code, though courts debate whether oil and gas leases truly qualify since the lessor's main obligation is often just to collect royalty payments. The bankrupt operator (or the bankruptcy trustee) has the option to:

Assume the lease. The operator continues to honor the lease terms, including royalty payments. If assumed, the debtor must cure all defaults under the agreement. Operations continue as before, possibly under a reorganization plan.

Assign the lease. The operator sells or transfers the lease to another company as part of the bankruptcy process. The new operator takes over the lease obligations, including your royalty payments.

Reject the lease. The operator abandons the lease. This is less common for producing leases because they're assets with value. If a lease is rejected, it terminates, and your minerals revert to being unleased. You can lease to someone else.

In most oil and gas bankruptcies, the wells and leases are sold to another operator as part of the bankruptcy proceeding. The assets have value, and buyers line up to acquire them at a discount.

What Happens to Your Royalty Payments

During the bankruptcy, payments may be delayed or suspended while the court sorts out the company's obligations. Royalties are considered an obligation of the operator, and the bankruptcy court typically allows them to continue during reorganization. But delays are common.

Pre-bankruptcy unpaid royalties are typically treated as unsecured claims. If the operator owed you royalties for months before the filing, you may need to file a proof of claim with the bankruptcy court. You'll receive notice with instructions. File the claim. The amount you recover depends on the bankruptcy outcome, and it may be less than what you're owed.

Post-bankruptcy royalties (from production occurring after the filing) should be paid currently, even during the bankruptcy. If a new operator acquires the assets, they assume the going-forward obligations.

What to Do

Watch your mail. If an operator files for bankruptcy, you'll receive a notice from the bankruptcy court. It will include the case number, filing date, and instructions for filing claims.

File a proof of claim. If you're owed unpaid royalties from before the bankruptcy, submit a proof of claim by the deadline specified in the court notice. Include documentation (check stubs, division orders, calculations of the amount owed).

Don't panic about the wells. Producing wells have value. Someone will almost certainly acquire them. The transition may take months, but the wells are unlikely to be abandoned.

Watch for a new operator. When the assets are sold, the new operator should contact you, issue a new division order, and resume payments. If months pass after the sale without hearing from anyone, contact the new operator directly. Check the state oil and gas commission website to see who the current operator of record is.

Keep records. Document every payment you did or didn't receive, every notice from the court, and every communication with the old and new operators. If there's a dispute about what you're owed, your records are your evidence.

Well Abandonment Risk

The biggest risk in an operator bankruptcy is that marginal wells (low production, high operating costs) may be abandoned. If a well isn't economically viable, no buyer will want it, and the bankrupt operator may not have funds to properly plug it. State regulators have plugging funds and bonding requirements for this scenario, but the process can be slow.

If a well on your property is plugged, the lease terminates (no production, no lease). Your minerals are unleased and available for future development if conditions change.

The Silver Lining

Operator bankruptcies, while disruptive, often result in a stronger operator taking over. The acquiring company may be better capitalized, more efficient, and more responsive than the original operator. And your mineral ownership is never at risk. The worst case is a temporary interruption in payments and some paperwork to file claims. The underlying asset is still yours.

Keep your MinRight records current through the transition. Note the date the old operator stopped paying, record the bankruptcy case number, and update the operator when the new company takes over. When the new operator sends a division order, compare it to your records before signing.