March 16, 2020 Read More →

Oil price crash pushing independent U.S. producers to the brink of bankruptcy

S&P Global Market Intelligence ($):

When the 2014 to 2016 oil and gas price collapse took hold, a large number of independent producers found themselves in dire straits. If prices do not rebound quickly in 2020, the industry could be facing a similar situation, or worse.

During the two-year price downturn, producers who had overspent in an effort to expand were faced with suddenly overloaded balance sheets and high breakeven prices. That left many dealing with the prospect of bankruptcy, and at least 70 filed for Chapter 11 bankruptcy protection in 2016 alone. Producers now have far lower breakeven costs, but a number still have damaged balance sheets dating back a half-decade. Prolonged exposure to prices in the low- to mid-$30 per barrel range could push many over the edge.

“If prices remain depressed below $40 per barrel for more than a few weeks, we will likely see a repeat of 2016,” Haynes and Boone LLP Partner Buddy Clark said. Haynes and Boone has kept a tracker of producers that have filed for bankruptcy since 2015, a total that stood at 208 in December 2019. The 2019 total of 42 was the highest in three years, and Clark said the number had already increased in the opening months of 2020 even before the price war between Saudi Arabia and Russia sent prices crashing March 9.

There could have been more bankruptcies in 2015 and 2016, but there was a saving grace: banks and other funding sources were willing to pump capital into the sector, keeping a number of producers above water. Those sources have now dried up, leaving independents with fewer options.

“For those producers still standing and faced with near-term debt maturities, there is less access to capital now than there was in 2016, with fewer options to restructure, other than filing for bankruptcy court protection,” Clark said.

A possible exit route for struggling companies — being acquired — appears to be blocked by the price crash. Producers that have made acquisitions were frequently punished by investors before prices lost double-digits per barrel overnight; now, very few expect to have the free cash flow to make such a move.

[Mark Passwaters]

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