Oil & Gas Asset Sales, Bankruptcies are Expected to Continue in 2016

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The income statements of Oil & Gas Producers took a severe beating in the third quarter, with more than $43 billion of write-downs to reflect the reduced value of reserves, according to data compiled by Industrial Info and EnerCom Incorporated (Denver, Colorado), an industry consultancy. The $43 billion is not a comprehensive total, as results from smaller companies and private firms were not included.

The non-cash asset write-downs, reported in firms' third-quarter earnings statements, were the reason so many companies ended third quarter with large net losses. The write-downs tended to depress a company's stock price only marginally--about $1 to $3 per share in most cases--because investors are well aware that oil prices have declined dramatically since their mid-2014 highs. The U.S. Securities and Exchange Commission (SEC) (Washington, D.C.) requires all publicly-traded companies to adjust the reported value of their assets each quarter based on current market prices.

Ten companies reported billion-dollar-plus asset impairments in the third quarter. The companies, and their respective write-downs, are:

• Royal Dutch Shell Plc (NYSE:RDSA) (The Hague, Netherlands): $7.9 billion
• EOG Resources Incorporated (NYSE:EOG) (Houston, Texas): $6.3 billion
• Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma): $5.9 billion
• Apache Corporation (NYSE:APA) (Houston, Texas): $3.7 billion
• Freeport McMoRan Incorporated (NYSE:FCX) (Phoenix, Arizona): $3.5 billion
• Occidental Petroleum Corporation (NYSE:OXY) (Houston, Texas): $3.3 billion
• Southwestern Energy Company (NYSE:SWN) (Spring, Texas): $2.8 billion
• Whiting Petroleum (NYSE:WLL) (Oklahoma City, Oklahoma): $2.6 billion
• Anadarko Petroleum Corporation (NYSE:APC) (The Woodlands, Texas): $1.5 billion
• Encana Corporation (NYSE:ECA) (Calgary, Alberta): $1.1 billion

Numerous other companies reported significant asset-impairment charges, including:

• Marathon Oil Company (NYSE:MRO) (Houston, Texas): $949 million
• Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas): $502 million
• Williams Companies Incorporated (NYSE:WMB) (Tulsa, Oklahoma): $477 million
• EXCO Resources Incorporated (NYSE:XCO) (Dallas, Texas): $339 million
• ConocoPhillips (NYSE:COP) (Houston, Texas): $195 million
• Continental Resources Incorporated (NYSE:CLR) (Oklahoma City, Oklahoma): $97 million

In some cases, the write-downs have caused banks to modify the size and terms of oil & gas companies' loans and lines of credit. As the oil boom surged, oil companies took out billions of dollars of asset-backed loans secured by the value of their oil in the ground. Loans that were fully collateralized by $100-per-barrel oil were seriously under-collateralized when oil sold for about $45 per barrel, which it did on September 30, when the third quarter ended. Depending on how much of the loan has been drawn down, banks may readjust the terms of the loan, forcing oil companies to either sell assets or partially repay loans. For more information about oil companies' Autumn borrowing base redetermination meetings with their banks, see September 3, 3015, article Investors See Opportunities in Oil & Gas Market as Big Players Adjust to New Reality.
br> Haynes and Boone LLP (Dallas, Texas), a law firm with extensive operations in the oil & gas business, surveyed bankers and producers about their expectations for the Autumn borrowing base redetermination meetings. It reported 79% of those surveyed expected to see a decline in a borrower's asset base, with the average decrease being 39%.

When the law firm asked respondents about the most likely path that borrowers would take in the face of a shrinking borrowing base, 37% predicted borrowers would try to renegotiate the terms of their loans, while 35% forecast the sale of non-core assets. An additional 18% said producers would seek capital infusions from hedge funds or private equity firms. Also, 7% predicted companies would restructure or declare bankruptcy.

In early November, Haynes & Boone said 36 North American oil & gas producers filed Chapter 11 bankruptcies this year. Lawyers at the firm predicted more Chapter 11 filings would be taking place.

In an interview with The Wall Street Journal, Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management, a division of U.S. Bancorp (NYSE:USB) (Minneapolis, Minnesota), said: "There's been more efficiency (gains) in the space than we all expected, and that's helped current owners hold on a little longer. We're not seeing as much turnover in the oil patch as we'd expect, in terms of weak hands to strong hands. But things like that will need to happen at some point."

The ongoing rationalization in the Oil Patch likely will be accelerated if the Federal Reserve increases interest rates in the near future, as Fed officials have signaled. The Fed has kept interest rates at nearly zero for many years, which has made it easier for oil & gas companies to finance their exploration and drilling programs. Although Fed officials have said rate increases will be slow, any increase in interest costs will increase a company's borrowing costs, further stressing their operations and forcing corporate decisions on asset sales.

"Producing oil & gas is an inherently cyclical business, and we're about one year into a deep and painful down cycle," noted Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals Industries. "When oil was at or above $100 a barrel, producers loaded up on debt and didn't focus as much on operating efficiencies. Some producers weren't even making money when oil sold for $100 a barrel."

"Now, the pendulum has swung back: company managers are focusing on operating more efficiently," Davis noted. "Non-core assets are being sold. Prices for equipment and services are being forced downward. Thousands have lost their jobs. Some communities are seeing the effects in reduced tax and royalty payments. In many areas, hotels and restaurants are not as full as they once were."

"The industry goes through this rationalization about once a generation, and each time the industry emerges stronger," Davis continued. "When the shake-out ends, there will be fewer players than before, and the asset portfolios will be different. We expect this rationalization will continue through a good bit of 2016, until global demand picks up and the oil market is no longer over-supplied."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 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/.