A weekly look at what occurred in the oil markets of the U.S. and the world this past week and what’s ahead.
Bankruptcies in the oil patch dropped in 2017 and 2018 but they are climbing again this year.
That’s the conclusion of a recent report from the Oil Patch Bankruptcy Monitor of Haynes & Boone, a law firm with an extensive oil patch practice.
The reason is pretty simple – the price is too low for many companies’ debt burden to handle.
“I would say that as a general matter, there is nothing unique about them,” Eli Columbus, a partner in the firm’s Dallas office, told FreightWaves about the jump in bankruptcies this year. “It’s just a matter of commodity prices not moving up for a sustained period of time. Companies are not generating enough revenue so they can’t service their debts, causing distress again.”
One thing about the bankruptcies that go on in the oil sector is that the assets developed by the companies tend to stick around. That’s good news for the trucking industry because it means that there’s a greater chance its services in the oilfields will continue to be needed.
“A lot of these bankruptcy filings are just balance sheet restructures,” Columbus said. “We just end up taking a lot of the debt off the balance sheet. The former debt holders are new the new owners but the assets remain where they are.”
The actual numbers in the Haynes and Boone report tell the story of 2019. When the price of oil and natural gas first underwent their big crash, starting in 2014, it resulted in more than 100 bankruptcy filings over the next two years. As prices stabilized somewhat, there were 24 filings in 2017 and 28 in 2018. But there were 26 filings through mid-August of 2019, with 20 of them coming since the start of May, according to the law firm.
What’s notable about Columbus’ comments is that some of the filings are for companies that have been keeping their head above water since the 2014 crash but are now in enough trouble that they need to do some sort of restructuring.
“So now it’s 2019 and we’re still under a $60 a barrel average price and it’s been dipping closer to $50,” Columbus said. “There’s that dynamic where we have not seen a sustained period where both companies and investors see a sustained kind of uptick in commodity prices.”
The list does not include a category of companies that have restructured their balance sheet in private negotiations with their lenders. Columbus said that approach is easier when there are a smaller number of creditors. “But it’s difficult to do in some situations because you have to get a significant number of creditors to agree to it,” he said. “Sometimes with the numbers, you just can’t do it without the court. It’s easier when you have a more isolated number of creditors to deal with.”
Another type of restructuring – but one that would land on Haynes & Boone’s list – is the “prepackaged” bankruptcy, in which the creditors and the company have worked out the resolution separate from the court process but the bankruptcy court is needed to complete the restructuring.
And then you have a category that is unique – the so-called “Chapter 22” companies. Halcon Resources is one example of that. And a company called Vanguard Resources just exited its second Chapter 11. If it goes into Chapter 11 again, it won’t be doing so as Vanguard; it changed its name to Grizzly Energy.
One way that can help a company avoid going into Chapter 11 is for a company to hedge its exposure. Increasingly, that isn’t a choice that the company must ponder; it’s part of the agreement with its lenders. So many of the companies that are on the Haynes & Boone list of bankruptcies are likely to have hedged some of their production. It isn’t always a guarantee but it can be a lifesaver if the numbers work.
On its blog, Petroleum Argus recently had a good overview of some of the hedging strategies now being put into place by various producers. In particular, Occidental Petroleum (NYSE: OXY), fresh off its acquisition of Anadarko for $57 billion, has taken to hedging for the first time since 2006, according to Argus. It will have about 40 percent of its 2020 and 2021 output under hedge.
Hedge positions are now required to be disclosed by publicly traded companies. Argus has sifted through some of those reports. It said Pioneer Natural Resources (NYSE: PXD) took new hedge positions in the second quarter of this year when WTI averaged a little less than $60/barrel but was as high as $66/barrel in April. As of August 2, the company had hedged about one-third of its first-half production at a Brent price of $67/barrel.The goal is to get that up to about half of its output hedged.
According to Argus’ research, one of the more aggressive companies has been Laredo Petroleum (NYSE: LPI), which it says has hedged about 95 percent of its production at a weighted-average floor of $60.42/barrel this year and a little less than that next year.
The easiest number to look at when trying to figure out supply/demand balances are the forecasts for what OPEC needs to produce to fill the gap between demand and non-OPEC supply. The next step is to take a look at what OPEC is producing now. You’ll then get a sense of what is needed to be done.
The monthly report by OPEC itself, out late last week, said OPEC will need to produce 29.4 million barrels per day (b/d) next year. The International Energy Agency’s estimate is 29.3 million b/d.
And in July – after Saudi cuts, Venezuelan sanctions, Iranian sanctions and problems in Libya, a whole slew of developments working to keep output down – OPEC still produced more than those two estimates. OPEC said its own production was 29.61 million b/d; the S&P Global Platts number was 29.88 million b/d. So even after all those reductions, current output could still be viewed as “too much” if it continues into next year. That’s a key reason why geopoloitical problems like tanker bombings and drone attacks just don’t have the same bullish kick that they had in the past.