Now, the fact that the Oil and Gas industry is passing through a rough patch is not unknown to many. This steep decline, for the past two years, has surged the cases of oil and gas bankruptcies. And this, buffeted by the onset of the COVID-19 pandemic has forced even more companies to join on the bandwagon. But, why? What caused these well-established companies to file for bankruptcy? Read on.
Oil and Gas Bankruptcies: How and Why they started
The year started off on a high note with just 7 reported and confirmed cases of bankruptcy in the Oil and Gas industry in the first quarter (Q1), which is an impressive statistic, in comparison to the number of cases filed in 2019. However, the merrier days did not last long enough as the COVID-19 outbreak resulted in a massive slump in oil futures. Consequently, damaging the financial stability of all operator companies in the industry.
Now, a major factor owing to which companies are forced to file for bankruptcy is impending debts. A layman might wonder, “Why to take debts, when you can’t pay them off?”. Unfortunately for all of the companies that are in the industry, except for a very few, they all have some amount of debt for their continuing operations. It is common in the industry for an exploration and production company to seek financial aid. The inability to pay off these lingering debts results in bankruptcy. The challenge for so many companies that were able to survive the downturn in the 2015 to 2017 era was that they didn’t eliminate all of the debt on their books. They kept what many consider to be a manageable amount of debt for purposes of operations, management, and monitoring activities. That was all premised on a belief that by 2019-2020, oil prices would reinstate back to prior standards.
The monumental role of debt fueling bankruptcy in Oil and Gas
Another common link between companies that have filed for bankruptcy is what is known as, “cheap debt”. A lot of the interest was attracted towards the oil and gas industry over the last 10 years was from “independent investors” who flooded money into the industry on a junior basis — meaning they loaned money to oil and gas companies at typically low-interest rates with anticipation of tremendous cash flow out of the oil and gas industry; hoping that it would be easy for these companies to repay those loans on a timely basis. However, that was most certainly not what happened. Instead, we observed the oil prices going negative last month; whilst they could only resuscitate till the high 20s, as of writing. This was simply not high enough to repay the billions of dollars of debt that was invested in the industry over the last decade.
COVID-19: A key contributor in piling up bankruptcy cases
The wave of bankruptcy started with Whiting Petroleum Limited (WLL), which was once a rising star in the US shale industry. The current conditions will almost surely set off a spike in oil patch bankruptcies in the coming months. And unlike the 2014-2016 oil crash, some of those companies may not survive. Prolonged periods with declining oil prices followed by the slump to $20 per barrel on an average amid the COVID-19 outbreak forced these companies into bankruptcy.
“Nearly 100 US oil and gas producers could file for Chapter 11 over the next year”, according to Buddy Clark, co-chair of the energy practice at Houston law firm Haynes and Boone. Which is approximately equal to the total number of bankruptcies in 2015 and 2016 combined when oil prices crashed to $26 a barrel.
Are these bankruptcies a blessing in disguise for the industry, right now?
The percentage of oil and gas companies with distressed credit ratios spiked from about 25% at the end of last year to 94% in mid-March, according to S&P Global Ratings. With a mountain of impending debts, and no financial fortune in the industry; the future appears to be gloomy. Bankruptcy cases have been piling up, with a lot more to follow. Weak companies who have been hanging on to the industry for too long are the ones who are facing bankruptcy now. However, the elimination of these companies might, in turn, improve the fate of the industry? Let’s see!
(The views and opinions expressed in this article do not necessarily reflect the views of Energy Dais.)