Burgess COMMENTARY

Peter Burgess

North American Oil And Gas Bankruptcies Rise Above 70

A number of new oil and gas bankruptcies has been announced in recent days, pushing the total number in North America above 70, while others start to emerge from bankruptcy protection.

WHAT: More bankruptcies have been announced by US producers in the past few days.

WHY: Prices have not yet recovered enough for the wave of bankruptcies to die down and producers continue to struggle with debt.

WHAT NEXT: More companies could soon emerge from bankruptcy protection but still face some difficult decisions.

OVER 70 North American oil and gas companies are now estimated to have declared bankruptcy since the oil price collapsed, with more than 60 of them in the US. Many of the companies are comparatively small. And the number of bankruptcies is still rising even though prices have recovered somewhat since February’s lows of less than US$30 per barrel.

The number of the filings raises the question of how high the price of oil has to go in order to stem the tide of bankruptcies. West Texas Inter¬mediate (WTI) crude futures contracts rose to almost US$49 per barrel on May 18, their highest level in seven months. Fitch Ratings has estimated that over a quarter of US exploration and production firms have failed to pay off their most risky debt, and the rate of company-level defaults could rise above one third later in 2016. It has been suggested that this could shave US$40 billion off the US$110 billion that shale drillers borrowed from investors when times were good.

The Wall Street Journal recently cited Deloitte as estimating that 175 drillers globally are in danger of bankruptcy, and that another 160 companies face financial distress. Smaller independents in the US, where the shale boom led to a lot of borrowing, account for a large portion of this.

Recent bankruptcies

The past few days have been turbulent. US Gulf of Mexico driller Stone Energy has said it is restructuring financially and is considering bankruptcy. Standard & Poor’s has now lowered its credit rating on the firm to D from CCC. Meanwhile, Houston-based Linn Energy filed for Chapter 11 bankruptcy protection shortly before reaching a deal to restructure about US$8.3 billion in debt and secure US$2.2 billion in new financing. Holders of at least 66.67% of its credit facility have agreed to the “broad terms” of the restructuring.

SandRidge Energy also sought bankruptcy protection after reaching a prearranged debt-re¬structuring agreement with creditors for two thirds of its US$4.1 billion in outstanding debt. In the two weeks before that, California-based master limited partnership (MLP) Breitburn Energy Partners, Penn Virginia, Chaparral Energy, Mid¬states Petroleum and Ultra Petroleum also filed for Chapter 11 bankruptcy protection.

Others are expected to follow. Exco Resources said it was evaluating its options, including an out-of-court restructuring. In Canada, Calgary-based Penn West Petroleum announced this week that it was in danger of defaulting on debt by the end of the current quarter, but that it hoped to sell assets and raise capital in other ways in order to stay afloat. The company said discussions with its lenders were ongoing.

Penn West’s situation is illustrative of the broader industry’s woes. It had posted a loss of C$100 million (US$76 million) in the first quarter of 2016, and produced just over 77,000 barrels per day of oil during this period, down from 94,000 bpd during the same quarter of 2015. The company said its ability to continue operating was dependent on reaching amending agreements with its lenders.

Most recently, on May 18 shale driller Hal¬con Resources said it would initiate a pre-pack¬aged Chapter 11 bankruptcy filing so that it could restructure its balance sheet and wipe out US$1.8 billion in debt.

Emerging from bankruptcy

In a new development, some oil and gas companies are now starting to emerge from bankruptcy, having restructured their debt. Late last month, Swift Energy announced it had emerged from Chapter 11 bankruptcy protection after less than four months. The company said it had restructured its debt, closed on its new US$320 million senior secured credit facility and sold off assets in Louisiana to TEXEGY.

More recently, Magnum Hunter Resources also emerged from Chapter 11 bankruptcy protection less than five months after filing.

Reuters reported bankruptcy lawyers as saying that by eliminating its entire US$1 billion debt load, cutting costs by renegotiating con¬tracts with suppliers and moving quickly, Magnum Hunter had provided a template for other cash-strapped drillers.

However, the companies now emerging from bankruptcy protection face a decision on whether to minimise spending and borrowing until oil prices recover or to drive growth by ramping up drilling, leading to increased losses in the short term until the price environment has improved.

In Magnum Hunter’s case, the company is predicted to keep spending low for now. Nonetheless, it told the court that it anticipated posting net losses until 2018 and projected its oil and gas reserves to shrink by about 11% over this period. However, Reuters noted that while this was considered a low-risk approach, the company still would run the risk of forfeiting some of its leases while declines to its existing wells could have an impact on cash flow, hurting longer-term prospects.

“Everybody is having this issue. It’s a dilemma,” Magnum Hunter’s then-CEO, Gary Evans, who subsequently left the company last week, told Reuters. “Do you hold ‘em or fold ‘em?” According to Evans, even when debt-free, Magnum Hunter would need gas prices to rise to US$2.50-3.00 per 1,000 cubic feet (US$70.80-84.96 per 1,000 cubic metres) equivalent from about US$2 per 1,000 cubic feet (US$56.64 per 1,000 cubic metres) currently to see the 15% return on new wells the company normally uses as a target when making spending decisions.

Other companies have not been able to emerge from bankruptcy the way Swift and Magnum Hunter have done. Instead they have seen their assets sold off at bargain prices. The path ahead is by no means easy for those firms still going through the bankruptcy process.

Among those hoping to emerge from bankruptcy as quickly as possible is Halcon, which is pursing a “rather sizeable plan that would dramatically change the company’s balance sheet”, Wunderlich Securities said in a note. If it is successful, Halcon could emerge from bankruptcy by late summer 2016, Wunderlich added. What next?

If the industry needs WTI prices of US$50 per barrel to put an end to new bankruptcies or allow firms to deploy more rigs, as some have predicted, then that day has almost arrived. But as Wood Mackenzie’s vice president of corporate analysis, Fraser McKay, told Bloomberg in April, “It’s not just about touching US$50. It’s about touching, maintaining and having the perception of future prices above US$50 a barrel before you start sanctioning projects that are economic at US$50 a barrel.”

The coming weeks and months are likely to have some difficult decisions in store for producers, including those emerging from bankruptcy protection.

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