Bankruptcy Watch Key For Energy Industry Restructuring
“The avalanche of E&P and oil service bankruptcies is beginning to roll in, as predicted by the lawyers at Haynes and Boone. We look at their latest data, as well as a recent forecast for E&P bankruptcies through 2022 offered by Rystad Energy. ”
They said it was coming. What? The avalanche of energy company bankruptcies! That was the opinion of the energy and bankruptcy lawyers at Haynes and Boone when they began their Energy Tracker weekly Zoom calls earlier this year. Given the anticipated onslaught of filings, they decided to switch the frequency of their bankruptcy filings report for oil and gas and oilfield service companies from quarterly to monthly. For July, Haynes and Boone reported another seven oil service companies with $5.8 billion of debt, as well as nine more E&P companies with $47.0 billion in debt filed for bankruptcy protection. The lawyers’ prediction seems to be coming true.
The lawyers know the significance of bankruptcy protection in allowing companies time to rework their balance sheets. One downside to more frequent reporting is that many times the filings are made with preliminary data about company debts. Subsequent filings update the totals, but the corrections alter the prior debt totals that only become apparent to users of these reports when we are comparing the earlier debt totals with the most recent data. That happened to us when we were reconciling the June and July bankruptcy data for our charts below. While frustrating to have to revise earlier data, it is the price of “real-time” bankruptcy data, and that information outweighs the inconvenience.
We follow this data closely, as it helps in monitoring the hard work underway in restructuring these energy sectors, in light of the industry’s collapse. Understanding the pace of the restructuring is clouded by the nature of the companies failing, as well as the attitudes of their backers and soon-to-be new owners. Many companies filing bankruptcy are relatively young and are backed by optimistic investors, often private equity funds. While some are in capital-intensive subsectors, the older companies filing tend to be in the most capital-intensive sector - offshore drilling. This segment has been under financial pressure for much longer than the 2020 downturn. In fact, many of the companies were becoming financially stressed before the 2014 downturn started.
Exhibit 28. E&P Debt IS Approaching Record of 2016 SOURCE: Haynes and Boone, PPHB
An observation the Haynes and Boone attorneys offered, when comparing the 2015-2016 downturn to the current one, was that there might be fewer companies filing for bankruptcy protection, but much more debt is involved. As our charts for the E&P and oil service bankruptcies show, the number of companies that have filed for bankruptcy so far this year are approximately half the number that filed in either 2016 for E&P or 2017 for oil service, however, the total debt involved is rapidly approaching those earlier yearly totals. This is significant, given that we are only seven months into 2020.
In that regard, we were intrigued to see the forecast for E&P bankruptcies that energy consultant Rystad Energy showed last week. The forecast was based on a continuation of a $40 a barrel oil price for West Texas Intermediate (WTI) through 2022. The current 32 companies in bankruptcy would be joined by another 29, leaving the total nine short of the record 70 companies that filed in 2016. For 2021, Rystad projects 68 filings, and an additional 57 in 2022. The trajectory for debt involved in the filings for the three years 2020-2022 calls for a total of $66, $58 and $44 billion, respectively. Both 2020 and 2021 debt totals would exceed the amount involved in the 2016 bankruptcy cases. That is not a pretty forecast. It suggests that without higher oil prices soon, the struggle the oil and gas industry is having in restructuring and recovering from the oil price collapse will linger. That portends further turmoil for the oil service industry.
Exhibit 29. Oil Service Sector Is Reeling Under Debt Loans SOURCE: Haynes and Boone, PPHB
Monitoring this bankruptcy data is important if one desires to develop a feel for how the respective industry sectors may ultimately be reshaped. Bankruptcies that lead to the expunging of significant amounts of debt and bring in new shareholders are often keys to mergers or sales of businesses, or disposition of significant assets critical to restoring profitability, especially for the oil service sector. We will continue monitoring the Haynes and Boone data, as well as the observations of the firm’s lawyers, as they are in the midst of the industry restructuring. If Rystad’s forecast is anywhere close to accurate, these lawyers will be working hard for years to come.