Journally Speaking: Accelerated bankruptcies

Feb. 1, 2021

North American oil and gas bankruptcy filings will likely continue this year, but at a pace slower than that of 2020. Safe to say, many are hoping for more-precedented times.

Bankruptcies filed by North American oil and gas producers ticked upwards in 2019. At the time, the increase in year-over-year filings was indicative of reverberations of the 2015 oil price crash and was expected to continue through at least the first half of 2020. Commodity prices at the beginning of the year were challenging, but potentially manageable for many operators.

The COVID-19 pandemic nullified preliminary forecasts.

In January 2020, the price of oil was above $60/bbl. The outlook for bankruptcies was “not bad,” Mark Taylor, partner at Waller, told OGJ. That changed completely with the double impact of the oil price war and the dramatic drop in demand, and thus prices, caused by the COVID-19 crisis, he said. “The 100-plus oil and gas-related bankruptcies that were filed in 2020 were not foreseeable on Jan. 1, but not shocking in hindsight given the dramatic decline in prices and activity.”

The pandemic changed the market landscape, obliterating demand, but certain companies long over-leveraged may not have made it through 2020 regardless.

“There had been speculation leading into 2020 that debt levels were not sustainable over the long-term without an increase in prices. The ‘unprecedented times’ accelerated some bankruptcy filings, but also caused others [from companies] that would likely have been otherwise able to sustain operations at $60/bbl prices,” Taylor said. 

Looking specifically at North American oil and gas producers, 46 companies filed Chapter 11 in 2020, according to Haynes and Boone. The firm has been tracking bankruptcies in the industry since 2015. By October 2020, the total number of producer bankruptcies since 2015 hit a milestone of over 250 filings. The year also saw an increase in billion-dollar bankruptcies. Fourteen multibillion-dollar cases were filed in 2020, including those by Chesapeake, Ultra Petroleum, and Unit Corp., each involving more than $5 billion in aggregate debt. Ultra’s filing was its second in 5 years.

The aggregate debt (secured debt and unsecured debt) for the group in 2020 was comparable to the record 2016 levels. Perhaps a lesson learned from 2016 when 70 North American oil and gas producer bankruptcies were filed, secured debt increased to 46% from 35%.

The total amount of secured and unsecured debt involved in the producer cases since 2015 is about $175 billion, with those in 2020 accounting for more than 30% of total aggregate debt, Haynes and Boone said.

Texas accounted for 67% of total producer filings in 2020, with 31 in total. Delaware was the second most frequent jurisdiction with six filings in 2020.

As the world works to manage COVID-19, what might 2021 bring in terms of additional bankruptcies?

“I expect that filings will continue, but at a slower pace, especially since many of the producers that were already living at $100/bbl oil and did not have the staying power to weather price decreases, have already filed,” said Eric Taube, a partner at Waller.

In addition to pandemic-related challenges, other obstacles remain.

“We’ll continue to see tightened capital markets in 2021, and certainly companies in the oil and gas sector will continue to face issues with borrowing base and financial covenants,” Taylor said.

Uncertainty surrounding production cuts from Saudi Arabia will impact the market, as will policies from the new US presidential administration. Policies that reduce drilling on federal lands should increase prices, Taylor continued, but the change could be offset if sanctions against Iran are reduced.

Given the above uncertainties, both Taylor and Taube said $50/bbl has been mentioned in industry circles as a tipping point where stabilization and—perhaps—even some growth can occur. Taube said he personally thinks the price point is a bit low.

With the aforementioned factors and others not tied to pricing, time will tell which companies can stay afloat.