U.S. Upstream Industry Braces for Further Bankruptcies
More U.S. oil & gas companies are expected to file for bankruptcy in the economic wake of the Covid-19 pandemic that continues to cause unprecedented disruption to American businesses.
The decline in the financial health of the upstream industry has been exacerbated by record high industry-wide levels of leverage and a virtual shutdown of the high-yield (‘junk’) bond market critical to mid- and small-sized producers’ ability to refinance. International factors, including in-fighting between OPEC producers caused by some member countries not adhering to production cut quotas and renewed lockdowns due to a second wave of coronavirus infections in major developing economies, could result in another sharp drop in global oil prices.
While the recent recovery in oil prices may lessen some U.S. operators’ need for government support, industry analysts have estimated that as many as 50 additional U.S. oil companies could succumb to bankruptcy in 2020 if WTI prices average US$35 per barrel this year, with the number of bankruptcies burgeoning to over 100 companies if WTI remains in the US$35 to $40 range through 2021.
Among the most significant E&P companies to file for Chapter 11 bankruptcy protection this year was Whiting Petroleum Corp. The NYSE-listed company, which is focused on operations in the Bakken/Three Forks Play in the Williston Basin of North Dakota and Montana, signed a Restructuring Support Agreement (RSA) with debt holders and creditors in early April to refinance approximately US$3.44 billion of outstanding debt.
At the end of June, fracking pioneer Chesapeake Energy Corp. executed a RSA with debt holders to secure US$925 million in Debtor-In Possession (DIP) financing. The company was one of the first U.S. companies to aggressively deploy breakthroughs in horizontal drilling and hydraulic fracking to produce oil and natural gas previously trapped in tight shale formations. However, over the past decade, the company over-extended itself by amassing too much debt, whilst several claims of corporate malfeasance against its top management and a series of environmental violations and operational accidents left the company severely stressed.
Another smaller operator, Lilis Energy Inc., also entered into Chapter 11 and executed a RSA with its existing RBL lenders and certain other creditors at the end of June. The Houston-based company, which is focused on operations in the Permian basin in Texas and New Mexico, has secured a Senior Secured Debtor-In-Possession (DIP) credit facility of US$15 million, and an exit RBL facility of US$55 million to help tide it through the next several months of operations.
Oil prices in the current range of US$35 to $40 per barrel will continue to cause significant stress to the balance sheets of leveraged U.S. operators, primarily shale-focused producers that still require US$45 to $50 oil to break even operationally.
Even as most U.S. operators have already announced major cuts to planned capital spending budgets for the remainder of 2020 (and beyond), their survival at $40 oil remains in doubt, and more bankruptcy filings are expected during the course of Q3 2020.