Case Document 7 Filed in TXSB on 01/16/17 Page 1 of 56

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1 Case Document 7 Filed in TXSB on 01/16/17 Page 1 of 56 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: Chapter 11 MEMORIAL PRODUCTION Case No. 17- ( ) PARTNERS LP, et al., (Joint Administration Requested) Debtors. 1 (Emergency Hearing Requested) EMERGENCY MOTION OF DEBTORS PURSUANT TO 11 U.S.C. 105, 362, 363 AND 364, BANKRUPTCY RULES 2002, 4001, 6003, 6004, AND 9014, AND BANKRUPTCY LOCAL RULE , FOR INTERIM AND FINAL ORDERS (I) AUTHORIZING THE DEBTORS TO ENTER INTO AMENDED AND RESTATED SWAP AGREEMENTS AND HONOR OBLIGATIONS THEREUNDER, (II) GRANTING LIENS AND SUPERPRIORITY CLAIMS, AND (III) GRANTING RELATED RELIEF 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, as applicable, are: Memorial Production Partners LP (6667); Memorial Production Partners GP LLC; MEMP Services LLC (1887); Memorial Production Operating LLC; Memorial Production Finance Corporation (3356); WHT Energy Partners LLC; WHT Carthage LLC; Memorial Midstream LLC; Beta Operating Company, LLC; Columbus Energy, LLC; Rise Energy Operating, LLC; Rise Energy Minerals, LLC; Rise Energy Beta, LLC; San Pedro Bay Pipeline Company (1234); and Memorial Energy Services LLC. The Debtors mailing address is 500 Dallas Street, Suite 1600, Houston, Texas

2 Case Document 7 Filed in TXSB on 01/16/17 Page 2 of 56 THIS MOTION SEEKS AN ORDER THAT MAY ADVERSELY AFFECT YOU. IF YOU OPPOSE THE MOTION, YOU SHOULD IMMEDIATELY CONTACT THE MOVING PARTY TO RESOLVE THE DISPUTE. IF YOU AND THE MOVING PARTY CANNOT AGREE, YOU MUST FILE A RESPONSE AND SEND A COPY TO THE MOVING PARTY. YOU MUST FILE AND SERVE YOUR RESPONSE WITHIN 21 DAYS OF THE DATE THIS WAS SERVED ON YOU. YOUR RESPONSE MUST STATE WHY THE MOTION SHOULD NOT BE GRANTED. IF YOU DO NOT FILE A TIMELY RESPONSE, THE RELIEF MAY BE GRANTED WITHOUT FURTHER NOTICE TO YOU. IF YOU OPPOSE THE MOTION AND HAVE NOT REACHED AN AGREEMENT, YOU MUST ATTEND THE HEARING. UNLESS THE PARTIES AGREE OTHERWISE, THE COURT MAY CONSIDER EVIDENCE AT THE HEARING AND MAY DECIDE THE MOTION AT THE HEARING. REPRESENTED PARTIES SHOULD ACT THROUGH THEIR ATTORNEY. EMERGENCY RELIEF HAS BEEN REQUESTED. IF THE COURT CONSIDERS THE MOTION ON AN EMERGENCY BASIS, THEN YOU WILL HAVE LESS THAN 21 DAYS TO ANSWER. IF YOU OBJECT TO THE REQUESTED RELIEF OR IF YOU BELIEVE THAT THE EMERGENCY CONSIDERATION IS NOT WARRANTED, YOU SHOULD FILE AN IMMEDIATE RESPONSE. THIS IS A MOTION FOR RELIEF FROM THE AUTOMATIC STAY. IF IT IS GRANTED, THE MOVANT MAY ACT OUTSIDE OF THE BANKRUPTCY PROCESS. IF YOU DO NOT WANT THE STAY LIFTED, IMMEDIATELY CONTACT THE MOVING PARTY TO SETTLE. IF YOU CANNOT SETTLE, YOU MUST FILE A RESPONSE AND COPY TO THE MOVING PARTY AT LEAST 7 DAYS BEFORE THE HEARING. IF YOU CANNOT SETTLE, YOU MUST ATTEND THE HEARING. EVIDENCE MAY BE OFFERED AT THE HEARING AND THE COURT MAY RULE. Memorial Production Partners LP ( MEMP ) and its debtor affiliates in the above-captioned chapter 11 cases, as debtors and debtors in possession (collectively, the Debtors ), respectfully represent as follows in support of this motion (this Motion ): Relief Requested 1. Pursuant to sections 105, 362, 363 and 364 of title 11 of the United States Code (the Bankruptcy Code ), Rules 2002, 4001, 6003, 6004, and 9014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), Rule of the Bankruptcy Local Rules for the Southern District of Texas (the Bankruptcy Local Rules ), and the Procedures for Complex Chapter 11 Bankruptcy Cases (the Complex Case Procedures ) promulgated by the United States Bankruptcy Court for the Southern District of Texas (the Court ), the Debtors request authority for: 2

3 Case Document 7 Filed in TXSB on 01/16/17 Page 3 of 56 (a) the Debtors to: (1) enter into amended and restated Swap Agreements (as defined herein) (the Amended and Restated Swap Agreements ) with certain of the Prepetition Secured Parties (as defined in the Cash Collateral Orders) 2 (collectively, the Continuing Hedging Lenders ) pursuant to the Commodity Risk Management Policy (as defined herein); (2) maintain outstanding prepetition Hedging Positions (as defined herein) and enter into postpetition Hedging Positions with the Continuing Hedging Lenders during the pendency of these chapter 11 cases pursuant to the Amended and Restated Swap Agreements; (3) perform under and honor, pay, or otherwise satisfy all obligations and indebtedness of the Debtors with respect to prepetition Hedging Positions and postpetition Hedging Positions under the Amended and Restated Swap Agreements (such obligations and indebtedness with respect to the prepetition and postpetition Hedging Positions under the Amended and Restated Swap Agreements, the Swap Obligations ) as they come due; (4) grant Adequate Protection Liens to the Prepetition Agent (each as defined in the Cash Collateral Orders), for the benefit of the Continuing Hedging Lenders, to secure the Swap Obligations; and (5) grant allowed Adequate Protection Claims (as defined in the Cash Collateral Orders) to the Continuing Hedging Lenders on account of the Swap Obligations; (b) (c) the Prepetition Agent to exercise all rights and remedies with respect to the Collateral for the benefit of the Continuing Hedging Lenders in accordance with the Cash Collateral Orders following the occurrence and during the continuation of an Event of Default or following the occurrence of a Termination Event under, and as defined in, the Amended and Restated Swap Agreements; and the Continuing Hedging Lenders to offset, net, and apply any payment amounts that such Continuing Hedging Lenders would otherwise be obligated to pay to any Debtor following the occurrence and during the continuation of an Event of Default or following the occurrence of a 2 The Cash Collateral Orders, collectively, are any interim or final order entered pursuant to the Emergency Motion of Debtors Pursuant to 11 U.S.C. 105, 361, 362, 363 and 507, Bankruptcy Rules 2002, 4001, 6003, 6004, and 9014 and Bankruptcy Local Rule , Inter Alia, (i) Authorizing Debtors Limited Use of Cash Collateral, (ii) Granting Adequate Protection to the Prepetition Secured Parties, (iii) Modifying the Automatic Stay, and (iv) Scheduling a Final Hearing (the Cash Collateral Motion ). 3

4 Case Document 7 Filed in TXSB on 01/16/17 Page 4 of 56 Termination Event under, and as defined in the Amended and Restated Swap Agreements in accordance with the terms of such Amended and Restated Swap Agreement to reduce permanently the Prepetition Indebtedness. 2. A proposed form of order granting the relief requested herein on an interim basis is annexed hereto as Exhibit A (the Interim Order ). A copy of the master agreement for the Amended and Restated Swap Agreements is annexed to the Interim Order as Exhibit 1. A list of the Continuing Hedging Lenders is annexed to the Interim Order as Exhibit 2. Jurisdiction 3. This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. 157 and 1334 and the Order of Reference to Bankruptcy Judges, General Order (S.D. Tex. May 24, 2012) (Hinojosa, C.J.). This is a core proceeding pursuant to 28 U.S.C. 157(b). Venue is proper before this Court pursuant to 28 U.S.C and Background 4. On the date hereof (the Petition Date ), each of the Debtors commenced with this Court a voluntary case under chapter 11 of the Bankruptcy Code. The Debtors continue to operate their business and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner, or statutory committee of creditors has been appointed in these chapter 11 cases. Contemporaneously herewith, the Debtors have filed a motion requesting joint administration of these chapter 11 cases pursuant to Bankruptcy Rule 1015(b) and Rule of the Bankruptcy Local Rules. 5. Additional information regarding the circumstances leading to the commencement of these chapter 11 cases and information regarding the Debtors business and capital structure is set forth in the Declaration of Robert L. Stillwell, Jr. in Support of the 4

5 Case Document 7 Filed in TXSB on 01/16/17 Page 5 of 56 Debtors Chapter 11 Petitions and Related Requests for Relief (the Stillwell Declaration ), which has been filed contemporaneously herewith. The Debtors Hedge Portfolio 6. As is customary in the Debtors industry, in the ordinary course of business, Memorial Production Operating LLC ( MPO ) enters into hedging positions (each, a Hedging Position ) pursuant to financial derivative contracts (collectively, the Swap Agreements ) to hedge the Debtors exposure to interest rate and commodity price risks in accordance with an established commodity risk management policy. The Swap Agreements are vital to the success of the Debtors business. They directly affect the Debtors ability to generate stable cash flows and manage liquidity. Through the Swap Agreements, the Debtors are able to hedge against adverse oil and gas price fluctuations, provide long-term cash flow predictability, and thereby protect the economic value of their operations. 7. Historically, the Debtors have hedged their crude oil, natural gas, and natural gas liquids production with Hedging Positions that include commodity swaps, basis swaps, and collars (as further described below). 3 (a) (b) Commodity Swaps. In a typical commodity swap, MPO agrees to pay its counterparty a price, per unit of production, based upon an agreed-upon third-party price index. The counterparty, in turn, agrees to pay MPO a fixed price per unit of production. A commodity swap is in the money for MPO when the index price is lower than the fixed price. In that case, MPO will be paid the difference between the two prices. A commodity swap is out of the money if the index price is higher than the fixed price; MPO must pay the difference. Commodity swaps are typically settled in cash on a monthly basis. Basis Swaps. In a typical basis swap, MPO agrees to pay its counterparty an amount, per unit of production, based upon a reference basis, i.e., the 3 The Debtors have also historically entered into interest-rate swaps. As of the Petition Date, the Debtors Hedging Positions did not include any interest-rate swaps, and the Debtors do not intend to enter into any interest-rate swaps during these chapter 11 cases. 5

6 Case Document 7 Filed in TXSB on 01/16/17 Page 6 of 56 difference between a commodity s price on an index (e.g., NYMEX for natural gas or ICE Brent for oil) and at a specified delivery point. The counterparty, in turn, agrees to pay MPO a fixed basis per unit of production. A basis swap is in the money if the reference basis is less than the fixed basis, in which case MPO will be paid the difference. A basis swap is out of the money if the reference basis is greater than the fixed basis, in which case MPO must pay the difference. Basis swaps are typically settled in cash on a monthly basis. (c) Collars. In a typical collar, MPO and its counterparty agree to a floor and ceiling for a particular reference price (which could be an index price or price at a specified delivery point, for example). If the reference price exceeds the contractual ceiling, MPO agrees to pay its counterparty the amount, per unit of production, of such excess. If the reference price falls below the contractual floor, MPO s counterparty agrees to pay MPO the amount, per unit of production, of such shortfall. Collars either expire or are settled every month. Collars typically are only settled when the reference price is outside of the floor and ceiling prices, in which case the collar is settled in cash. 8. As mentioned, each Hedging Position is entered into pursuant to, and governed by, a Swap Agreement between MPO and its counterparty. Each Swap Agreement, in turn, is comprised of an International Swap Dealers Association Master Agreement (an ISDA Master ) and a schedule attached to the ISDA Master. The ISDA Master is a standard form of contract that sets forth the non-economic terms of all of the Hedging Positions it governs. The parties to an ISDA Master make certain elections and may also modify the standard form by agreeing upon overriding terms that are set forth in the schedule. Each Swap Agreement to which MPO is a party permits the parties to net and offset amounts payable between them for transactions that occur on the same date and in the same currency. Additionally, following the occurrence and during the continuation of an Event of Default or following the occurrence of a Termination Event under a Swap Agreement, the non-defaulting party generally has the contractual right to offset, net, and apply any payment amounts that such non-defaulting party would otherwise be obligated to pay to the defaulting party against amounts owed to that defaulting party. 6

7 Case Document 7 Filed in TXSB on 01/16/17 Page 7 of As of the Petition Date, the Debtors have 21 Hedging Positions summarized as follows: three natural gas swaps, two natural gas collars, nine oil swaps, two oil collars, and five natural gas liquids swaps. The Debtors estimate the aggregate mark-to-market value of the foregoing Hedging Positions, calculated using standard industry valuation processes and as of January 12, 2017, to be approximately $75 million, which would be owed to the Debtors upon termination of the Swap Agreements. The Debtors Commodity Risk Management Policy 10. The Debtors entry into Hedging Positions is governed by their internal risk management policy (the Commodity Risk Management Policy ). The Commodity Risk Management Policy is a set of guidelines that the Debtors follow to ensure that Hedging Positions are closely monitored and are in the best interests of the Debtors economic stakeholders. The Debtors Commodity Risk Management Policy is conservative in nature, and permits the Debtors to enter into Hedging Positions with the limited purpose of stabilizing exposure to commodity price fluctuations and managing risks associated with oil and gas production and delivery. Use of guidelines like the Commodity Risk Management Policy is common among companies in the oil and gas industry. The three main principles of the Commodity Risk Management Policy are described below. 11. Approval and Monitoring. Entry into a Hedging Position requires approval from the Debtors Chief Executive Officer, President, or Chief Financial Officer after consultation with members of the management team. The Debtors Chief Financial Officer and Treasurer are responsible for monitoring the derivative contracts to ensure that the terms and type of contract are consistent with the forecasted production volumes being hedged. 12. Creditworthy Counterparties. Pursuant to the Commodity Risk Management Policy, the Debtors enter into Swap Agreements only with creditworthy 7

8 Case Document 7 Filed in TXSB on 01/16/17 Page 8 of 56 counterparties, deemed by management as competent and competitive market makers. The Debtors Chief Financial Officer and Treasurer are responsible for monitoring the Debtors financial exposure to counterparties and for notifying management if any appear to be experiencing financial difficulty or otherwise creating a material risk to the Debtors. All of the counterparties to the Debtors Swap Agreements are lenders under the Prepetition Credit Agreement (as defined in the Cash Collateral Orders). 13. No Speculative Hedging. The Debtors do not engage in speculative hedging. The Debtors Hedging Positions are directly tied to the Debtors forecasted future oil and gas production levels. The Debtors have historically hedged commodity price exposure by entering into Hedging Positions such that approximately 65% to 85% of their estimated production from total proved reserves over a three-to-six-year period is fully hedged at any one time. The economic terms of the Hedging Positions depend upon, among other things, current and expected oil and natural gas prices at the time the Debtors enter into such transactions. The continuation of the Debtors hedging subject to the Commodity Risk Management Policy is critical to maximizing the value of the Debtors estates. Prepetition Negotiations with the Continuing Hedging Lenders 14. Prepetition, the Swap Agreements and the Hedging Positions entered into thereunder provided the Debtors with cash flow protections and significant liquidity. As a result of the Existing Events of Default (as defined in the RBL Plan Support Agreement (as defined herein)), absent an alternative arrangement, the Debtors faced the potential risk of having their Swap Agreements terminated upon or prior to the commencement of these chapter 11 cases. As a result, the Debtors engaged in extensive negotiations with the Continuing Hedging Lenders regarding the Debtors ability to continue hedging during these chapter 11 cases. Their negotiations resulted in an agreed form of order (the Interim Hedging Order ) and form of 8

9 Case Document 7 Filed in TXSB on 01/16/17 Page 9 of 56 Amended and Restated Swap Agreement attached to that certain Plan Support Agreement, dated as of January 13, 2017, by and among the Debtors and the Prepetition Secured Lenders (as defined in the Cash Collateral Orders) (the RBL Plan Support Agreement ), whereby the Continuing Hedging Lenders have agreed to forbear from exercising certain rights or remedies under the Swap Agreements, including those resulting from the filing of the Debtors chapter 11 petitions. In exchange for this forbearance, and as an inducement for the Continuing Hedging Lenders to maintain the Swap Agreements and enter into postpetition Hedging Positions with the Debtors, the Debtors agreed to amend and restate their existing Swap Agreements in the form of the Amended and Restated Swap Agreements and to seek authority (i) to secure and otherwise ensure payment of all Swap Obligations with (a) Adequate Protection Claims against each of the Debtors, jointly and severally, and (b) Adequate Protection Liens on the Collateral that rank pari passu with the Adequate Protection Liens granted pursuant to the Cash Collateral Orders, and (ii) for other protections in the Interim Hedging Order that are customary in orders regarding the continuation of prepetition derivatives contracts and entry into new derivatives contracts postpetition (all as described further below). 4 4 The Adequate Protection Liens include, effective as of the Petition Date, and subject to the Carve Out (as defined in the Cash Collateral Orders), (i) a valid, binding, continuing, enforceable, fully-perfected first priority senior priming security interest in, and lien on, the Prepetition Collateral (as defined in the Cash Collateral Orders) and all other property of the Debtors, now owned and hereafter acquired, other than causes of action under the Bankruptcy Code (but, subject to entry of a final Cash Collateral Order, including the proceeds or property recovered in respect of Avoidance Actions (as defined in the Cash Collateral Orders)), subject only to (a) the Carve Out, (b) valid, perfected and enforceable prepetition liens and security interests (if any) which are senior in priority to the Prepetition Secured Parties liens or security interests as of the Petition Date, and (c) valid and unavoidable liens in existence immediately prior to the Petition Date that are perfected subsequent to the Petition Date as permitted by section 546(b) of the Bankruptcy Code, and (ii) a valid, binding, continuing, enforceable, fully-perfected junior-priority lien on and security interest in all other prepetition and postpetition property of the Debtors (other than the property described in clause (i) above), now owned and hereafter acquired, subject only to (i) the Carve Out, (b) valid, perfected and unavoidable liens (if any) in existence immediately prior to the Petition Date 9

10 Case Document 7 Filed in TXSB on 01/16/17 Page 10 of The terms of the RBL Plan Support Agreement and the Amended and Restated Swap Agreements and the protections afforded under the Interim Hedging Order reflect the result of the Debtors arms length, good faith negotiations with the Continuing Hedging Lenders. Absent the Continuing Hedging Lenders agreement to continue hedging, the Debtors would be exposed to significantly greater commodity price risk during these chapter 11 cases. Conversely, entering into the Amended and Restated Swap Agreements and maintaining and entering into new Hedging Positions in accordance with its terms will permit the Debtors to achieve their business and risk-management objectives and will thus benefit all parties in interest, all of which would be adversely affected if the Debtors did not have Hedging Positions during a sharp decline in commodity prices. As a result, the Debtors believe that the hedging arrangement set forth in the Interim Hedging Order is in the best interest of their estates and economic stakeholders and should be approved. Section 363(c) of the Bankruptcy Code Authorizes the Debtors to Continue Hedging Positions and Enter Into New Hedging Positions Under the Amended and Restated Swap Agreements 16. Section 363(c)(1) of the Bankruptcy Code authorizes a debtor in possession to use property of the estate in the ordinary course of business without notice or a hearing. The purpose of section 363(c)(1) is to provide the debtor in possession with the which are senior to the Prepetition Secured Parties liens or security interests, and (c) valid and unavoidable liens in existence immediately prior to the Petition Date that are perfected subsequent to the Petition Date as permitted by section 546(b) of the Bankruptcy Code. See Cash Collateral Motion at 6; Cash Collateral Orders 3. The Adequate Protection Claims are an allowed superpriority administrative expense claim against each of the Debtors on a joint and several basis with priority over any and all other administrative expense claims against the Debtors (subject only to the Carve Out), including all claims of the kind specified under sections 503(b) and 507(b) of the Bankruptcy Code, payable from all prepetition and postpetition property of the Debtors (including, subject to entry of the final Cash Collateral Order, the proceeds of property recovered in respect of any Avoidance Actions). See Cash Collateral Motion at 6; Cash Collateral Orders 3. 10

11 Case Document 7 Filed in TXSB on 01/16/17 Page 11 of 56 flexibility to engage in the ordinary transactions required to operate its business without unneeded oversight by its creditors or the court. See In re Roth Am., Inc., 975 F.2d 949, 952 (3d Cir. 1992) ( Section 363 is designed to strike [a] balance, allowing a business to continue its daily operations without excessive court or creditor oversight and protecting secured creditors and other from dissipation of the estate s assets. ) (alteration in original; internal quotation marks omitted); Med. Malpractice Ins. Ass n v. Hirsch (In re Lavigne), 114 F.3d 379, 384 (2d Cir. 1997) (same); Armstrong World Indus., Inc. v. James A. Phillips, Inc. (In re James A. Phillips, Inc.), 29 B.R. 391, 394 (S.D.N.Y. 1983) (holding that where a debtor in possession is merely exercising the privileges of its status, there is no general right to notice and a hearing concerning particular transactions conducted in the ordinary course of business). 17. Hedging is squarely within the Debtors ordinary course of business. The Debtors have historically hedged production as an integral part of their liquidity management. Further, companies in the Debtors industry routinely enter into hedging transactions like the Hedging Positions entered into under the Swap Agreements. Across jurisdictions, courts have authorized such companies to continue such transactions postpetition, provide appropriate protections to non-debtor counterparties in recognition of their exposure to risk and extension of credit, and enter into new hedging positions postpetition particularly when subject to policies like the Commodity Risk Management Policy. See, e.g., In re Linn Energy, Inc., Ch. 11 Case No (Bankr. S.D. Tex. Aug. 16, 2016) (ECF No. 820); In re SandRidge Energy, Inc., Ch. 11 Case No (Bankr. S.D. Tex. June 30, 2016) (ECF No. 433); In re Stone Energy Corporation, Ch. 11 Case No (Bankr. S.D. Tex. Dec. 27, 2016) (ECF No. 210); In re Atlas Resource Partners, L.P., Ch. 11 Case No (Bankr. S.D.N.Y. Aug. 29, 2016) (ECF No. 133); In re Halcón Resources Corporation, Ch. 11 Case No (Bankr. D. Del. 11

12 Case Document 7 Filed in TXSB on 01/16/17 Page 12 of 56 July 29, 2016) (ECF No. 54); In re Penn Virginia Corporation, Ch. 11 Case No (Bankr. E.D. Va. May 13, 2016) (ECF No. 65); In re Energy Future Holdings Corp., Ch. 11 Case No (Bankr. D. Del. June 6, 2014) (ECF No. 864). 5 The Debtors request similar relief here. The Debtors Should Be Authorized to Grant Adequate Protection Liens and Superpriority Adequate Protection Claims for the Swap Obligations Pursuant to Section 364 of the Bankruptcy Code 18. Section 364 of the Bankruptcy Code authorizes a debtor to obtain credit on a superpriority or senior secured basis when obtaining such credit on other terms is unavailable. 11 U.S.C. 364(c), (d). Courts generally afford debtors considerable deference to determine, in their business judgment, the terms under which they obtain postpetition secured credit. See, e.g., In re L.A. Dodgers LLC, 457 B.R. 308, 313 (Bankr. D. Del. 2011); In re Curlew Valley Assocs., 14 B.R. 506, (Bankr. D. Utah 1981). 19. Here, the Continuing Hedging Lenders have required, as a condition to their continued forbearance under the RBL Plan Support Agreement, that the Debtors support the Swap Obligations with: (1) superpriority Adequate Protection Claims against each of the Debtors, jointly and severally, equal to the Swap Obligations and (2) Adequate Protection Liens to secure the Swap Obligations, which liens shall rank pari passu with the Adequate Protection Liens granted pursuant to the Cash Collateral Orders. Importantly, the Prepetition Agent, on behalf of the Prepetition Secured Parties, the prepetition liens of which will be primed by the Adequate Protection Liens, has consented to this relief in order to permit the Debtors to continue hedging with the Continuing Hedging Lenders. Were the Debtors to seek postpetition hedging arrangements with third parties, any such counterparties would insist on being similarly secured 5 Due to the voluminous nature of the orders cited herein, such orders are not attached to this Motion. Copies of these orders are available upon request of the Debtors counsel. 12

13 Case Document 7 Filed in TXSB on 01/16/17 Page 13 of 56 (consistent with typical practice in hedging arrangements). The Debtors do not believe that they would be able to provide such a priming lien consensually. Courts in this and other jurisdictions have approved similar relief. See, e.g., In re Stone Energy Corporation, Ch. 11 Case No (Bankr. S.D. Tex. Dec. 27, 2016) (ECF No. 210); In re Atlas Resource Partners, L.P., Ch. 11 Case No (Bankr. S.D.N.Y. Aug. 29, 2016) (ECF No. 133); In re Linn Energy, Inc., Ch. 11 Case No (Bankr. S.D. Tex. Aug. 16, 2016) (ECF No. 820); In re Halcón Resources Corporation, Ch. 11 Case No (Bankr. D. Del. July 29, 2016) (ECF No. 54); In re SandRidge Energy, Inc., Ch. 11 Case No (Bankr. S.D. Tex. June 30, 2016) (ECF No. 433); In re Penn Virginia Corporation, Ch. 11 Case No (Bankr. E.D. Va. May 13, 2016) (ECF No. 65); In re Energy Future Holdings Corp., Ch. 11 Case No (Bankr. D. Del. June 6, 2014) (ECF No. 860). Similar relief is warranted here. The Protections Afforded to the Continuing Hedging Lenders Are Consistent with the Safe Harbors, Are a Product of Good Faith Negotiations, and Are a Valid Exercise of the Debtors Business Judgment 20. The Swap Agreements are governed primarily by sections 546, 555, 556, 559, 560, and 561 of the Bankruptcy Code. Specifically, sections 546(e) (g) (providing relief from certain avoidance actions), section 555 (providing for the liquidation of certain security accounts), section 556 (providing for the liquidation of forward and commodity contracts), section 559 (providing for the liquidation of certain repurchase agreements) of the Bankruptcy Code, in combination with sections 362(b)(6), (7), and (17) of the Bankruptcy Code, section 560 (providing for the liquidation, termination, and acceleration of swap agreements), and section 561 (providing for the termination, liquidation, and acceleration of master netting agreements) often referred to as the safe harbors contain special protections for counterparties to future, forward, and certain other financial contracts that enable such counterparties to: 13

14 Case Document 7 Filed in TXSB on 01/16/17 Page 14 of 56 (a) (b) (c) terminate, liquidate, and apply collateral held under a swap agreement upon the bankruptcy filing of the other party, notwithstanding the antiipso-facto protections of section 365(e)(1) of the Bankruptcy Code; protect prepetition payments made under a swap agreement by a debtor to a non-debtor party from the avoidance powers of a trustee or debtor in possession, except in particular cases of actual intent to defraud other creditors; and offset mutual debts and claims against the debtor under and across contracts entitled to safe harbor protection without the need to obtain relief from the automatic stay, provided the underlying agreements and section 553 of the Bankruptcy Code permit such setoff. 21. As discussed, the Debtors negotiated a forbearance under the Continuing Hedging Lenders Swap Agreements because the Debtors believe that, without such forbearance, the Continuing Hedging Lenders may seek to terminate the Swap Agreements or Hedging Positions during these chapter11 cases. Consistent with the terms of the RBL Plan Support Agreement, the Debtors request authority to modify the provisions of sections 362 and 553 of the Bankruptcy Code to the extent necessary so that the Prepetition Agent and the Continuing Hedging Lenders can exercise and enforce rights and remedies under any Amended and Restated Swap Agreement, the Interim Order, and the Cash Collateral Orders. In the Debtors business judgment, these modifications, which were the product of good faith negotiations with the Continuing Hedging Lenders, are fair and reasonable under the present circumstances, are necessary to protect the Debtors continued hedging, and are in the best interests of the Debtors estates and all stakeholders. The Debtors Should Be Authorized to Pay Prepetition Obligations Under the Amended and Restated Swap Agreements 22. Although the Debtors do not believe they owe any prepetition obligations under the Swap Agreements at this time, to the extent that any such obligations do arise, the Debtors believe there is substantial authority under the Bankruptcy Code to support payment or 14

15 Case Document 7 Filed in TXSB on 01/16/17 Page 15 of 56 other satisfaction of such obligations in the ordinary course as they become due. Courts in the Fifth Circuit have recognized that it is appropriate to authorize the payment of prepetition obligations where necessary to protect and preserve the estate, including an operating business s going-concern value. See, e.g., In re CoServ, L.L.C., 273 B.R. 487, 497 (Bankr. N.D. Tex. 2002). 23. Here, the prepetition Hedging Positions are, on balance, in the money, meaning that at current market prices they represent an obligation to the Debtors, rather than an obligation of the Debtors. The Debtors also have two sets of offsetting collar Hedging Positions. When these collar sets are settled or expire there will be a payment obligation for one component and an offsetting payment receivable for the other component. The combined value of the payment obligations and receivable obligations of such collar, upon settlement, will net to a single gain or loss for the Debtors on account of the collar set. In exchange for allowing the collar sets to continue postpetition, when they are ultimately settled, the Debtors will need to satisfy any obligations under the out-of-the-money Hedging Position. 24. It is well within the Court s authority to authorize the payment or other satisfaction of the relatively small amount of prepetition Swap Obligations that are outstanding and may become due, under the collars or otherwise, in exchange for the Continuing Hedging Lenders agreement to continue hedging. Importantly, any prepetition Swap Obligations are secured by first priority prepetition liens on substantially all of the Debtors assets, equal in priority to the claims outstanding under the Prepetition Credit Agreement. Payment of such prepetition Swap Obligations, if any, therefore would affect only the timing of payment, not the amount. The Debtors therefore request that the Court authorize payment of any prepetition Swap Obligations. Payments of prepetition hedging obligations are typically approved by courts when requested in connection with a debtor s request to continue hedges postpetition. See, e.g., In re 15

16 Case Document 7 Filed in TXSB on 01/16/17 Page 16 of 56 Halcón Resources Corporation, Ch. 11 Case No (Bankr. D. Del. July 29, 2016) (ECF No. 54); In re SandRidge Energy, Inc., Ch. 11 Case No (Bankr. S.D. Tex. June 30, 2016) (ECF No. 433); In re Linn Energy, Inc., Ch. 11 Case No (Bankr. S.D. Tex. May 17, 2016) (ECF No. 128); In re Energy Future Holdings Corp., Ch. 11 Case No (Bankr. D. Del. June 6, 2014) (ECF No. 860); In re Calpine Corp., Ch. 11 Case No (Bankr. S.D.N.Y. Feb. 9, 2006) (ECF No. 763); In re Mirant Corp., Ch. 11 Case No (Bankr. N.D. Tex. Aug. 28, 2003) (ECF No. 556). Similar relief is warranted here. The Automatic Stay Should Be Modified on a Limited Basis 25. The Interim Hedging Order includes a modification of the automatic stay provisions of section 362 of the Bankruptcy Code to (as set forth in more detail in the Interim Hedging Order): (a) (b) (c) permit immediate and unconditional exercise and enforcement of rights and remedies, including applying the proceeds of terminated Swap Agreements to permanently reduce the Prepetition Indebtedness under the Prepetition Credit Agreement (as provided in the Interim Hedging Order), by (i) the Prepetition Agent on behalf of any Continuing Hedging Lender and (ii) the Continuing Hedging Lenders, in either case following an event of default or termination under the Amended and Restated Swap Agreements; permit the Prepetition Agent, on behalf of the Continuing Hedging Lenders, to take all actions to validate and perfect the liens and security interests granted by the Interim Hedging Order; and provide that a Continuing Hedging Lender s rights, powers, privileges, and remedies under the applicable Amended and Restated Swap Agreement and the Interim Order may not be modified, stayed, avoided, or otherwise limited by further order of the Court or any court proceeding under the Bankruptcy Code. 26. Section 362(d)(1) of the Bankruptcy Code provides that [o]n request of a party in interest and after notice and a hearing, the court shall grant relief from the stay... such as by terminating, annulling, modifying, or conditioning such stay - (1) for cause U.S.C. 16

17 Case Document 7 Filed in TXSB on 01/16/17 Page 17 of (d)(1). The Bankruptcy Code does not define the term cause, and whether cause exists must be determined on a case by case basis. In re Xenon Anesthesia of Tex., PLLC, 510 B.R. 106, 112 (Bankr. S.D. Tex. 2014). The Bankruptcy Code gives the court broad discretion to provide appropriate relief from the automatic stay as may fit the facts of a particular case. Id. (citing In re Atlantic Ambulance Associate, Inc., 166 B.R. 613 (Bankr. E.D.Va. 1994)). Here, cause exists to modify the automatic stay as provided in the Interim Hedging Order because, absent such relief, the Continuing Hedging Lenders would not be willing to continue hedging with the Debtors postpetition. The ability to hedge postpetition will help the Debtors maintain a stable cash flow during these chapter 11 cases and is a hard-negotiated and significant benefit of the Debtors entry into the RBL Plan Support Agreement. Relief from the stay as provided in the Interim Hedging Order is appropriate. 27. Stay modifications are typically approved by courts when sought in connection with a debtor s request to continue hedges postpetition. See, e.g., In re Stone Energy Corporation, Ch. 11 Case No (Bankr. S.D. Tex. Dec. 27, 2016) (ECF No. 210); In re Atlas Resource Partners, L.P., Ch. 11 Case No (Bankr. S.D.N.Y. Aug. 29, 2016) (ECF No. 133); In re Linn Energy, Inc., Ch. 11 Case No (Bankr. S.D. Tex. Aug. 16, 2016) (ECF No. 820); In re Halcón Resources Corporation, Ch. 11 Case No (Bankr. D. Del. July 29, 2016) (ECF No. 54); In re SandRidge Energy, Inc., Ch. 11 Case No (Bankr. S.D. Tex. June 30, 2016) (ECF No. 433); In re Penn Virginia Corporation, Ch. 11 Case No (Bankr. E.D. Va. May 13, 2016) (ECF No. 65); In re Energy Future Holdings Corp., Ch. 11 Case No (Bankr. D. Del. June 6, 2014) (ECF No. 860). Similar relief is warranted here. 17

18 Case Document 7 Filed in TXSB on 01/16/17 Page 18 of 56 Interim Relief Is Warranted 28. Under Bankruptcy Rule 4001(b), the Court may grant interim relief under section 363(c) of the Bankruptcy Code where, as here, such relief is necessary to avoid immediate and irreparable harm to the estate pending a final hearing. In evaluating requests for interim relief, courts generally apply the same business judgment standard applicable to other business decisions. See, e.g., In re Ames Dep t Stores, Inc., 115 B.R. at 40. Courts in this district routinely authorize payments to hedge counterparties and protections for ongoing hedging-related obligations on an interim basis to prevent immediate and irreparable harm to their estates. 29. Here, the Debtors and their estates will suffer immediate and irreparable harm if the relief requested herein is not granted on an interim basis. As mentioned, the Continuing Hedging Lenders agreement to forbear from exercising remedies is conditioned upon the Debtors obtaining interim relief. Absent such relief, the Continuing Hedging Lenders may terminate their Swap Agreements and Hedge Positions, and the Debtors ability to continue hedging could be curtailed, potentially exposing the Debtors the risk of future commodity market fluctuations that could cause irreparable harm to their estates. Accordingly, the Court should grant the relief requested herein on an interim basis. The Court Should Schedule a Final Hearing 30. Pursuant to Bankruptcy Rule 4001(b)(2), the Debtors request that the Court schedule a hearing no later than 30 days after the Petition Date to consider entry of the Final Order. The Debtors also request that they be authorized to serve a copy of the signed Interim Order, which fixes the time and date for the filing of objections, if any, by first class mail upon the notice parties listed below and that such notice of the Final Hearing be deemed sufficient under Bankruptcy Rule 4001(b)(3). 18

19 Case Document 7 Filed in TXSB on 01/16/17 Page 19 of 56 Applicable Financial Institutions Should Be Authorized to Receive, Process, Honor, and Pay Checks Issued and Transfers Requested to Pay the Swap Obligations 31. The Debtors further request that the Court authorize applicable financial institutions to receive, process, honor, and pay any and all checks issued, or to be issued, and electronic funds transfers requested, or to be requested, by the Debtors relating to the Swap Obligations, to the extent that sufficient funds are on deposit and standing in the Debtors credit in the applicable bank accounts to cover such payment. Bankruptcy Rule 6003 Has Been Satisfied 32. Bankruptcy Rule 6003 provides that, to the extent relief is necessary to avoid immediate and irreparable harm, a bankruptcy court may issue an order granting a motion to use, sell, lease, or otherwise incur an obligation regarding property of the estate, including a motion to pay all or part of a claim that arose before the filing of the petition before twenty-one days after filing of the petition. As explained above, any delay in granting the relief requested would jeopardize the forbearance under the RBL Plan Support Agreement and could significantly impede, if not eliminate, the Debtors ability to maintain their Hedging Positions, potentially resulting in irreparable harm to their estates. Accordingly, the Debtors have satisfied the requirements of Bankruptcy Rule Request for Bankruptcy Rule 6004 Waiver 33. The Debtors request a waiver of the notice requirements under Bankruptcy Rule 6004(a) and any stay of the order granting the relief requested herein pursuant to Bankruptcy Rule 6004(h). As explained above and in the Stillwell Declaration, the relief requested herein is necessary to avoid immediate and irreparable harm to the Debtors. Accordingly, ample cause exists to justify waiver of the notice requirements under Bankruptcy 19

20 Case Document 7 Filed in TXSB on 01/16/17 Page 20 of 56 Rule 6004(a) and the 14-day stay imposed by Bankruptcy Rule 6004(h), to the extent such stay applies. Reservation of Rights 34. Nothing contained in the Interim Order or in the Motion is intended to be or shall be construed as a waiver of the Debtors rights to dispute any valuations under the Swap Agreements that have not yet occurred. Notice 35. No trustee, examiner, or statutory committee of creditors has been appointed in these chapter 11 cases. No trustee, examiner, or statutory committee of creditors has been appointed in these chapter 11 cases. Notice of this Motion has been provided to (i) the Office of the United States Trustee for the Southern District of Texas; (ii) the Debtors 30 largest unsecured creditors on a consolidated basis; (iii) Wells Fargo Bank, National Association, as Prepetition Agent; (iv) Linklaters LLP, 1345 Avenue of the Americas, New York, New York (Attn: Margot Schonholtz, Esq. and Penelope Jensen, Esq.) as counsel to the RBL Credit Facility Agent; (v) Vinson & Elkins LLP, 2001 Ross Avenue, Suite 3700, Dallas, Texas (Attn: Paul Heath, Esq. and Bradley Foxman, Esq.), as counsel to the Prepetition Agent; (vi) Davis Polk & Wardwell LLP, 450 Lexington Avenue, New York, New York (Attn: Brian Resnick, Esq. and Angela Libby, Esq.) as counsel to the ad hoc group of unsecured noteholders; (vii) Wilmington Trust, National Association, as successor trustee under (a) that certain Indenture, dated as of April 17, 2013, for the issuance of 7 5/8% Senior Notes due 2021, as amended and supplemented, and (b) that certain Indenture, dated as of July 17, 2014, for the issuance of 6 7/8% Senior Notes due 2022, as amended and supplemented; (viii) Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York (Attn: Erez E. Gilad, Esq.) as counsel to Wilmington Trust, National Association; (ix) the Securities and Exchange 20

21 Case Document 7 Filed in TXSB on 01/16/17 Page 21 of 56 Commission; (x) the Internal Revenue Service; (xi) the United States Attorney s Office for the Southern District of Texas; and (xii) those persons who have formally appeared in these chapter 11 cases and requested service pursuant to Bankruptcy Rule In addition to the foregoing, notice of this Motion and any order entered hereon will be served on all parties required by Local Rule (d) (collectively, with the parties listed in the preceding paragraph, the Notice Parties ). Based on the urgency of the circumstances surrounding this Motion and the nature of the relief requested herein, the Debtors respectfully submit that no further notice is required. WHEREFORE the Debtors respectfully request entry of the proposed Interim Order granting the relief requested herein and such other and further relief as the Court may deem just and appropriate Dated: January 16, 2017 Houston, Texas /s/ Alfredo R. Pérez WEIL, GOTSHAL & MANGES LLP Alfredo R. Pérez ( ) 700 Louisiana Street, Suite 1700 Houston, Texas Telephone: (713) Facsimile: (713) and- WEIL, GOTSHAL & MANGES LLP Gary T. Holtzer (pro hac vice pending) Joseph H. Smolinsky (pro hac vice pending) 767 Fifth Avenue New York, New York Telephone: (212) Facsimile: (212) Proposed Attorneys for the Debtors and Debtors in Possession 21

22 Case Document 7 Filed in TXSB on 01/16/17 Page 22 of 56 Certificate of Service I hereby certify that a true and correct copy of the foregoing document was served by the Electronic Case Filing System for the United States Bankruptcy Court for the Southern District of Texas, and will be served as set forth in the Affidavit of Service to be filed by the Debtors proposed claims, noticing, and solicitation agent. /s/ Alfredo R. Pérez WEIL, GOTSHAL & MANGES LLP Alfredo R. Pérez ( ) 700 Louisiana Street, Suite 1700 Houston, Texas Telephone: (713) Facsimile: (713) WEIL:\ \1\

23 Case Document 7 Filed in TXSB on 01/16/17 Page 23 of 56 Exhibit A Proposed Interim Order

24 Case Document 7 Filed in TXSB on 01/16/17 Page 24 of 56 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION ) In re: ) ) Chapter 11 MEMORIAL PRODUCTION PARTNERS, L.P., et al. 1 ) ) Case No. [ ] ) Debtors. ) (Joint Administration Requested) ) INTERIM ORDER (I) AUTHORIZING THE DEBTORS TO ENTER INTO AMENDED AND RESTATED SWAP AGREEMENTS AND HONOR OBLIGATIONS THEREUNDER AND (II) GRANTING LIENS AND SUPERPRIORITY CLAIMS, AND (III) GRANTING RELATED RELIEF Upon the motion, dated January [ ], 2017 (the Motion ) 2 of Memorial Production Partners LP and its debtor affiliates, as debtors and debtors in possession (collectively, the Debtors ) for entry of an order (this Interim Order ), pursuant to sections 105(a), 362, 363 and 364 of title 11 of the United States Code (the Bankruptcy Code ), Rules 2002, 4001, 6003, and 6004 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ) and Rule of the Bankruptcy Local Rules for the Southern District of Texas (the Bankruptcy Local Rules ), authorizing: 1 The Debtors in these Cases, along with the last four digits of each Debtor s federal tax identification number, are: Memorial Production Partners LP (6667); Memorial Production Partners GP LLC; MEMP Services LLC (1887); Memorial Production Operating LLC; Memorial Production Finance Corporation (3356); WHT Energy Partners LLC; WHT Carthage LLC; Memorial Midstream LLC; Beta Operating Company, LLC; Columbus Energy LLC; Rise Energy Operating LLC; Rise Energy Minerals LLC; Rise Energy Beta, LLC; San Pedro Bay Pipeline Company (1234); and Memorial Energy Services LLC. The Debtors mailing address is 500 Dallas Street, Suite 1600, Houston, Texas Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in, as applicable, the Motion or any interim or final order entered pursuant to the Emergency Motion of Debtors Pursuant to 11 U.S.C. 105, 361, 362, 363 and 507, Bankruptcy Rules 2002, 4001, 6003, 6004, and 9014 and Bankruptcy Local Rule , Inter Alia, (i) Authorizing Debtors Limited Use of Cash Collateral, (ii) Granting Adequate Protection to the Prepetition Secured Parties, (iii) Modifying the Automatic Stay, and (iv) Scheduling a Final Hearing (collectively, the Cash Collateral Orders ).

25 Case Document 7 Filed in TXSB on 01/16/17 Page 25 of 56 (a) the Debtors to: (1) enter into amended and restated swap agreements (the Amended and Restated Swap Agreements ), governed by a master agreement substantially in the form attached hereto as Exhibit 1, with certain of the Prepetition Secured Parties identified on Exhibit 2 hereto (collectively, the Continuing Hedging Lenders ); (2) maintain outstanding prepetition Hedging Positions and enter into postpetition Hedging Positions with the Continuing Hedging Lenders during the pendency of the Cases pursuant to the Amended and Restated Swap Agreements; (3) perform under and honor, pay, or otherwise satisfy all obligations and indebtedness of the Debtors with respect to prepetition Hedging Positions and postpetition Hedging Positions under the Amended and Restated Swap Agreements (such obligations and indebtedness with respect to the prepetition and postpetition Hedging Positions under the Amended and Restated Swap Agreements, the Swap Obligations ) as they come due; (4) grant Adequate Protection Liens to the Prepetition Agent, for the benefit of the Continuing Hedging Lenders, to secure all Swap Obligations; and (5) grant allowed Adequate Protection Claims to the Continuing Hedging Lenders on account of the Swap Obligations; (b) (c) the Prepetition Agent to exercise all rights and remedies with respect to the Collateral for the benefit of the Continuing Hedging Lenders in accordance with the Cash Collateral Orders following the occurrence and during the continuation of an Event of Default (for which one of the Debtors is the Defaulting Party) or a Termination Event (for which one of the Debtors is the sole Affected Party) under, and as defined in, any of the Amended and Restated Swap Agreements; and the Continuing Hedging Lenders to setoff, net, and apply any payment amounts that such Continuing Hedging Lenders would otherwise be obligated to pay to any Debtor under the Amended and Restated Swap Agreements in accordance with the terms of such Amended and Restated Swap Agreement to reduce permanently the Prepetition Indebtedness; all as more fully set forth in the Motion; and the Court having jurisdiction over this matter pursuant to 28 U.S.C. 157 and 1334, and the Order of Reference to Bankruptcy Judges, General Order (S.D. Tex. May 24, 2012) (Hinojosa, C.J.); and the Court having found that consideration of the Motion and the relief requested is a core proceeding pursuant to 28 U.S.C. 157(b); and it - 2 -