The Tsunami Of Oil Patch Bankruptcies Continues
“The lawyers told us there was a huge wave of energy company bankruptcies coming in light of collapsed oil demand and prices. They said the wave may last for years, while reshaping the industry. It’s happening. ”
If you haven’t seen your favorite lawyer recently, it’s probably because he has been pressed into service assisting his bankruptcy compatriots deal with the fallout in the oil patch from extremely low oil prices and the Covid-19 destruction of oil demand. The first contributed to the latter, which was then exacerbated by Russia and Saudi Arabia launching a market share war at precisely the wrong time. To appreciate how dramatically the energy world has changed over the past few years, who would have ever envisioned the President of the United States brokering a truce in an oil war that was driving oil prices down? Traditionally, the U.S. economy benefited from low oil prices by boosting consumer budgets as gasoline and heating oil prices dropped. Now, the harm to the energy sector’s economic contribution outweighs consumer pocketbook benefits.
The energy world, unfortunately, is unfolding just as the bankruptcy lawyers at Haynes and Boone suggested it would earlier this year. They predicted that 2020 would see a tsunami of oil service and E&P companies forced into bankruptcy, as their cash flows dried up in the current industry environment and their balance sheets could no longer support their high debt loads. Substantiating that view, Haynes and Boone just released its August accounting of the sectors’ bankruptcy filings. We have updated our charts showing the number of companies and amount of debt involved in these filings.
Exhibit 26. Will A Slow August Be Followed By A Flood? SOURCE: Haynes and Boone, PPHB
August was a slow month for the E&P sector, as only four companies filed for bankruptcy, throwing $6.7 billion of secured and unsecured debt into the restructuring process. August’s debt represents 13% of the $51 billion of total E&P debt involved in bankruptcies. After the first eight months of 2020, we have nearly half the number of E&P companies in bankruptcies as filed in the record year of 2016. The debt involved so far this year is nearly 90% of the 2016 total. With one-third of the year remaining, we may not reach the 2016 record number of E&P companies, but we will clearly surpass that year’s debt total, which reflects how much more financially levered this sector had become. In a world of low oil and gas prices, debt has proven to be the proverbial “kiss of death.”
Exhibit 27. Oilfield Services Debt Tsunami Gains Speed SOURCE: Haynes and Boone, PPHB
The month of August proved more onerous for the oilfield services company bankruptcies, as 12 filed for court protection. That monthly total exceeded the number of bankruptcies filed in 2Q2020.
Surprisingly, the August bankruptcies only involved $1.3 billion in debt, as most of the companies were small. Through the first eight months of 2020, the 37 companies that have filed for protection represent 71% of the total number that filed in 2017. With respect to the amount of debt involved, the sector is about 3.5% away from matching the 2017 record bankruptcy debt. It is hard to imagine 2020’s final debt total not surpassing 2017’s record, and potentially by a wide margin.
It is no fun tallying these bankruptcy filings, as they reflect the hopes and dreams of many employees, bankers and investors that have landed in the trash heap. Unfortunately, the data reflects managements, in many cases, failing to understand the seismic shift the industry underwent in 2014. They did not appreciate the drastic actions that were necessary, and the speed with which they needed to happen, in order to survive. At some point, historians will write the industry’s history, but given the macro issues overhanging its future, we wonder if anyone will be around to benefit from the lessons learned.