Released April 28, 2020 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The extreme turbulence in crude oil prices will lead to an "avalanche" of bankruptcy filings this year, according to a partner at law firm Haynes and Boone LLP (Dallas, Texas). The shakeout this time will be worse than the mid-1980s crisis or the 2014-16 price collapse, Haynes and Boone's Patrick Hughes said in an interview. The Oil & Gas Industry, including oilfield services companies, could file up to 100 Chapter 11 cases in 2020, and the same or double that number could be worked out in non-bankruptcy restructurings.
But Hughes, a skier, noted that "avalanches comes in all sizes. There are smaller avalanches that take out a couple of snowmobiles, and then there are some bigger ones that take out the ski lodge."
His comments during an interview with Industrial Info left little doubt that this year's avalanche of bankruptcies and restructurings would be the kind that takes out the metaphorical ski lodges.
Hughes has practiced energy law since 1983, and he had a front-row seat for the industry's financial travails since then. He said today's situation "is more acute" than what happened in the mid-1980s and 2014-16, because "the industry is facing an historic, extended decline, with the double whammy of demand destruction and global oversupply." For more on the crisis in the oil patch, see April 6, 2020, article - Oil Patch Crisis: The Bricks Begin Falling; March 30, 2020, article - Oil Market: Where is the Bottom?; and March 16, 2020, article - Oil & Gas Producers Slash Capital Outlays, Citing Uncertainties over COVID-19, Crude Oil Price War.
The most recent Haynes & Boone Oil Patch Bankruptcy Monitor, dated April 6, showed seven exploration & production (E&P) companies filed for Chapter 11 reorganization during the first quarter. If 100 companies make Chapter 11 filings in 2020, that would be the greatest single-year number since the law firm began tracking bankruptcy filings by oil companies in 2015. Over the entire five-year period ending April 1, 2020, 215 U.S. E&P companies have filed for bankruptcy, involving more than $129 billion in aggregate debt.
Click on the image at right to see Haynes and Boone's most recent tally of E&P bankruptcy filings.
Analysts at Rystad Energy (Oslo, Norway) made waves last week when they predicted 533 U.S. E&P companies would declare bankruptcy by the end of 2021 if crude oil prices averaged $20 per barrel. A more extreme scenario, where crude prices averaged $10 per barrel, would push over 1,100 U.S. E&P firms into bankruptcy.
West Texas Intermediate (WTI) crude oil prices are expected to average about $29 per barrel this year, according to the April 7 Short-Term Energy Outlook from the U.S. Energy Information Administration (EIA) (Washington, D.C.). So far this month, WTI has traded for slightly around $25 per barrel, though it did take an unprecedented, heart-stopping plunge to negative $37.63 on April 20. For more on that, see April 22, 2020, article - Texas Panel Declines to Consider Measure to Cut Oil Production--For Now.
Asked to identify potential bankruptcy filers among U.S. upstream companies, Haynes and Boone's Hughes said: "Basins clearly matter. If you're operating in the Eagle Ford, which has a break-even point of $23 per barrel of WTI, you're in better shape than drillers in the Bakken, where the break-even is about $30 per barrel." The Permian has a break-even of about $28 per barrel, he said, citing data from the Federal Reserve. But other regions, like the Niobrara, are believed to have a higher break-even point, so drillers concentrated there could be at higher risk for a Chapter 11 filing.
Hughes predicted that companies won't be spending much on new development except what is required to keep their leases.
The Haynes and Boone partner said the fallout will be heavier for oilfield service companies, which typically lack the asset base to secure loans. "During a downturn like this, oilfield service companies are more prone to shutting their doors. Smaller ones will either stack their rigs or go by the wayside. Bigger firms will be better positioned to weather the storm," he predicted.
Whether a financially distressed company files for bankruptcy protection or works out a deal with its lenders depends a lot on the appetite a lender has for taking a financial haircut or taking a company's assets to satisfy the debt, he said. "In the 1980s, there was a deep aversion to converting debt to equity in a workout," Hughes said, "but today you have a more sophisticated environment for that conversion."
Turning to offshore E&P companies, Hughes said, "A fair amount of the independents already have been weeded out. There's definitely a high risk for potentially shutting-in production."
Generally speaking, E&Ps have carried more debt over the last five to seven years compared to earlier periods, but those firms also have made extensive use of hedging, meaning the risk in a low-price environment shifts to counter-parties, many of which are big regional banks. "The people getting crushed right now are the money center banks."
If oil producers decide to shut in production, as appears to be the case, lenders could ratchet up the pressure on midstream companies, which have so far not been hurt by the volatility in the oil industry.
Hughes commented: "I expect we're seeing an over-correction to the downside right now, just like there was an over-correction to the positive back in 2013 and 2014, when people thought $100 per barrel oil would continue indefinitely."
But Hughes cautioned there is always a potential for a "black swan" event, such as a shooting war with Iran, further deterioration of Venezuela or some provocative move from North Korea, that could rapidly alter the industry's outlook.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
But Hughes, a skier, noted that "avalanches comes in all sizes. There are smaller avalanches that take out a couple of snowmobiles, and then there are some bigger ones that take out the ski lodge."
His comments during an interview with Industrial Info left little doubt that this year's avalanche of bankruptcies and restructurings would be the kind that takes out the metaphorical ski lodges.
Hughes has practiced energy law since 1983, and he had a front-row seat for the industry's financial travails since then. He said today's situation "is more acute" than what happened in the mid-1980s and 2014-16, because "the industry is facing an historic, extended decline, with the double whammy of demand destruction and global oversupply." For more on the crisis in the oil patch, see April 6, 2020, article - Oil Patch Crisis: The Bricks Begin Falling; March 30, 2020, article - Oil Market: Where is the Bottom?; and March 16, 2020, article - Oil & Gas Producers Slash Capital Outlays, Citing Uncertainties over COVID-19, Crude Oil Price War.
The most recent Haynes & Boone Oil Patch Bankruptcy Monitor, dated April 6, showed seven exploration & production (E&P) companies filed for Chapter 11 reorganization during the first quarter. If 100 companies make Chapter 11 filings in 2020, that would be the greatest single-year number since the law firm began tracking bankruptcy filings by oil companies in 2015. Over the entire five-year period ending April 1, 2020, 215 U.S. E&P companies have filed for bankruptcy, involving more than $129 billion in aggregate debt.
Click on the image at right to see Haynes and Boone's most recent tally of E&P bankruptcy filings.Analysts at Rystad Energy (Oslo, Norway) made waves last week when they predicted 533 U.S. E&P companies would declare bankruptcy by the end of 2021 if crude oil prices averaged $20 per barrel. A more extreme scenario, where crude prices averaged $10 per barrel, would push over 1,100 U.S. E&P firms into bankruptcy.
West Texas Intermediate (WTI) crude oil prices are expected to average about $29 per barrel this year, according to the April 7 Short-Term Energy Outlook from the U.S. Energy Information Administration (EIA) (Washington, D.C.). So far this month, WTI has traded for slightly around $25 per barrel, though it did take an unprecedented, heart-stopping plunge to negative $37.63 on April 20. For more on that, see April 22, 2020, article - Texas Panel Declines to Consider Measure to Cut Oil Production--For Now.
Asked to identify potential bankruptcy filers among U.S. upstream companies, Haynes and Boone's Hughes said: "Basins clearly matter. If you're operating in the Eagle Ford, which has a break-even point of $23 per barrel of WTI, you're in better shape than drillers in the Bakken, where the break-even is about $30 per barrel." The Permian has a break-even of about $28 per barrel, he said, citing data from the Federal Reserve. But other regions, like the Niobrara, are believed to have a higher break-even point, so drillers concentrated there could be at higher risk for a Chapter 11 filing.
Hughes predicted that companies won't be spending much on new development except what is required to keep their leases.
The Haynes and Boone partner said the fallout will be heavier for oilfield service companies, which typically lack the asset base to secure loans. "During a downturn like this, oilfield service companies are more prone to shutting their doors. Smaller ones will either stack their rigs or go by the wayside. Bigger firms will be better positioned to weather the storm," he predicted.
Whether a financially distressed company files for bankruptcy protection or works out a deal with its lenders depends a lot on the appetite a lender has for taking a financial haircut or taking a company's assets to satisfy the debt, he said. "In the 1980s, there was a deep aversion to converting debt to equity in a workout," Hughes said, "but today you have a more sophisticated environment for that conversion."
Turning to offshore E&P companies, Hughes said, "A fair amount of the independents already have been weeded out. There's definitely a high risk for potentially shutting-in production."
Generally speaking, E&Ps have carried more debt over the last five to seven years compared to earlier periods, but those firms also have made extensive use of hedging, meaning the risk in a low-price environment shifts to counter-parties, many of which are big regional banks. "The people getting crushed right now are the money center banks."
If oil producers decide to shut in production, as appears to be the case, lenders could ratchet up the pressure on midstream companies, which have so far not been hurt by the volatility in the oil industry.
Hughes commented: "I expect we're seeing an over-correction to the downside right now, just like there was an over-correction to the positive back in 2013 and 2014, when people thought $100 per barrel oil would continue indefinitely."
But Hughes cautioned there is always a potential for a "black swan" event, such as a shooting war with Iran, further deterioration of Venezuela or some provocative move from North Korea, that could rapidly alter the industry's outlook.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
