Depressed oil prices that are unable to support heavy debt loads have pushed 90 oil and gas companies into Chapter 11 since the beginning to of 2015, according to the Haynes and Boone Bankruptcy Monitor. These companies have approximately .5 billion in total defaulted debt.
The oilfield service sector has also been feeling the squeeze of lower prices, with 80 service companies declaring bankruptcy with a total debt default of .5 billion. As recently as August 24, Key Energy Services filed for bankruptcy, with a plan that would make private-equity firm Platinum Equity LLC its largest shareholder.
A lot of operators have learned to adapt. They are surviving in today’s mid-s pricing conditions.
Completion techniques and new technologies that were developed when oil was and 0 a barrel in the 2011-early 2014 era have been further refined, and oil companies are using them to make production economic at per barrel in some parts of the U.S. But that may not be enough to stop further bankruptcies in the sector in the next year or two, according to some experts.
Oil & Gas 360® spoke with Haynes and Boone Partner Patrick Hughes about the challenges facing companies filing for Chapter 11. When asked how many more companies might go into bankruptcy at oil, Hughes indicated that analysts with whom he had spoken thought the industry was only one-third of the way through the bankruptcy cycle.
Much in the way the oil and gas industry itself has changed since the last downcycle, the financial system around it has transformed over the last 30 years. Deals are made at a much faster pace, and private equity players with access to huge amounts of capital offer a new wellspring of funding for new management teams to drill and develop resources.
“I don’t think it’s going to be [like it was in the ‘80s], in part because we have liquidity that never existed back then,” said Hughes. “The sophistication level of the lenders and of the equity sponsors and participants is so much higher than it was back then, that the system is able to work faster, which I think is a good thing. But, like most systems, it’s not perfect.”
Companies have an intense desire to move through the process quickly
The whole goal of a bankruptcy filing is to fix the company’s balance sheet, capital structure, and to give it a plan to continue operations. Sometimes, however, companies move through the bankruptcy process quickly to get back to their regular business, and issues are not addressed properly.
“These cases are outliers,” said Hughes, but “there’s an intense desire to minimize the friction of the process, and there’s a perception that, the longer you’re in the process, the more likely you are to have friction and additional expense, and potentially litigation.
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