The Race To Match Oil Patch Bankruptcy Records In 2020
“Does September’s oil patch bankruptcy data mark the calm before the storm, or have things begun to change? At the current pace, 2020 may produce new records for E&P and oil services bankruptcies and debt involved. ”
We now have the 2020 third quarter bankruptcy data for the E&P and Oilfield Services businesses from the Haynes and Boone law firm. It shows the financial devastation ongoing in the oil patch due to the oil price collapse and demand contraction this spring as the coronavirus shut down global economic activity. But the bankruptcies also reflect the ongoing challenges the industry has been dealing with since the late 2014 oil price drop that ushered in the era of ‘lower for longer’ crude oil prices.
With Haynes and Boone switching their data reporting frequency to monthly from quarterly earlier this year, we get to see the bankruptcy filings more frequently. Unfortunately, the timing of bankruptcy filings is driven by the state of negotiations between company managements and their lenders, which is subject to many twists and turns along the path to a balance sheet restructuring, rather than the calendar. Thus, looking at the data from any particular month only tells a part of the story, and maybe doesn’t truly reflect the state of the financial health of the industry, or the pressures to restructure company balance sheets. That is one reason why we show year-to-date bankruptcy data compared to prior years, rather than more frequent time periods.
Exhibit 9. E&P Bankruptcies Slowed In September SOURCE: Haynes and Boone, PPHB
For example, in the E&P sector, only four companies filed for bankruptcy in September with a total of $2.75 billion of secured and unsecured debt. One company, Oasis Petroleum Inc., accounted for $2.265 billion of that total. Absent that filing, one might have concluded that the E&P bankruptcy tsunami was ending. What is interesting, and does reflect the past financing focus of the E&P sector, is that year-to-date, we have had 30 fewer companies file for bankruptcy compared to the record year of 2016, but the total debt involved is within 10% of that record amount. With one quarter to go, it is not unreasonable to expect that we will exceed the 2016 debt total, but maybe not pass the total number of companies that filed for bankruptcy
Exhibit 10. Oil Service Debt About 1% Below 2017’s Record SOURCE: Haynes and Boone, PPHB
In the oilfield services sector, seven companies filed for bankruptcy in September, the same number as filed in July, but five fewer than in August. The total amount of debt involved in the filings was only $900 million, which was below the $1.3 billion of August, and is about one tenth of the debt amount for July. Total year-to-date debt now is slightly over 1% below the record amount in the 2017 bankruptcies. Just as with the E&P sector, one oilfield services company, FTS International, Inc. with $705 million of total debt, accounted for 78% of the total debt for September.
Although the fracturing crew count has climbed to 130 from 47 between early May and October, and 10% more drilling rigs, 25, have returned to work in the past two months, with WTI oil prices struggling to hold around $40 per barrel, it is hard to argue that the industry’s financial distress has eased much. In that regard, we are always reminded of the dialogue in Ernest Hemingway’s The Sun Also Rises.
“How did you go bankrupt? Bill asked.
“Two ways,” Mike said.
“Gradually and then suddenly.”
Unfortunately, that is the story of bankruptcy in the oil patch, and often for bankruptcies in general. Without a stronger recovery in oil demand and slightly higher oil prices, most companies in the oil patch are walking on a knife’s edge, and they can easily go from gradually to suddenly bankrupt.