Bankruptcies filed by North American oil and gas producers continued ticking upwards in 2019. Commodity prices thus far in 2020 remain challenging for producers. Incremental price increases may temporarily ease the squeeze, but one can expect bankruptcy filings to continue this year and potentially beyond.
Following a substantial decrease in 2017 and 2018, bankruptcies in the aforementioned oil patch subset increased, according to a Jan. 17 Haynes and Boone report. The firm has monitored such bankruptcies since 2015.
The initial wave of bankruptcies in 2015-16 consisted of more than 100 filings. That number decreased during 2017-18 with 24 bankruptcy filings in 2017 and 28 in 2018. Following a steep drop in oil prices in fourth-quarter 2018, however, the number of filings increased sharply into 2019, reaching 42 by yearend.
Over the entire 5-year period, 208 producers have filed for bankruptcy, involving some $121.7 billion in aggregate debt.
During 2015-19, Texas has seen the largest number of North America bankruptcy filings with 94 followed by Canada with 18. Colorado and Louisiana are tied at 11 filings during the period.
Commodity prices were key. Natural gas prices decreased by more than half last year compared to 2018, with little expectation in the near term for any price increases, Haynes and Boone said. “The oil market appears to be resistant to sustained increases in spite of two major geopolitical events in the Middle East: the September 14, 2019, attack on Saudi Aramco’s oil facilities and the heightened tensions following the January 7, 2020, drone attack on Iranian Major General Soleimani,” the report detailed.
The attack on the Abqaiq crude oil processing site initially disrupted about 5% of global liquid fuels supply and caused a significant increase in crude oil prices on the first trading day following the disruption. By early October, however, most operational capacity was restored and crude oil prices had declined to pre-attack levels.
Between Haynes and Boone’s Sept. 30, 2019, report and yearend, an additional nine producers—with an aggregate total debt of over $12.6 billion—filed bankruptcy. The largest of those, based on debt information obtained from schedules, declarations, or other filings, appears to be EP Energy Corp. and its subsidiaries. The Houston independent, with programs in the Eagle Ford, Permian, and Northeastern Utah areas, filed voluntary petitions under Chapter 11 reorganization in the US Bankruptcy Court for the Southern District of Texas in early October 2019.
One company that didn’t hit the list was Chesapeake Energy. A third-quarter 2019 10-Q filing included a scenario that it said, “raises substantial doubt about our ability to continue as a going concern.” The company is certainly not alone.
The “going concern” inclusion was “due to relatively high debt levels” and a leverage covenant “becoming increasingly tighter through 2021,” said Brian Kessens, senior portfolio manager at Tortoise Advisors, in a podcast Dec. 16. Since that time, Chesapeake has executed on various balance sheet restructuring efforts, easing immediate concerns.
How long can companies continue in a precarious state if oil and gas prices stay at current levels? Prices have trended up over the past 3 months, which has helped for now, Mark Taylor, partner at Waller told OGJ, but there is “a substantial amount of debt in the industry that matures in 2021.” That debt will start to present issues, “unless there is a dramatic increase, which seems unlikely.”
Waller partner Eric Taube told OGJ that “unless there is a dramatic shift in prices,” what the industry may be doing is “more of the ‘extend and pretend.’”
As the industry looks forward into the new year, does the scenery change? Not likely, echoed Haynes and Boone. The increase in year-over-year bankruptcy filings “indicates that the reverberations of the 2015 oil price crash will continue to be felt in the industry through at least the first half of 2020.”
Mikaila Adams | Managing Editor - News
Mikaila Adams has 20 years of experience as an editor, most of which has been centered on the oil and gas industry. She enjoyed 12 years focused on the business/finance side of the industry as an editor for Oil & Gas Journal's sister publication, Oil & Gas Financial Journal (OGFJ). After OGFJ ceased publication in 2017, she joined Oil & Gas Journal and was named Managing Editor - News in 2019. She holds a degree from Texas Tech University.