Oil Patch Bankruptcies Total $13.1 Billion So Far This Year

There have been 36 North American oil and gas producers that have commenced Chapter 11 bankruptcy proceedings so far this year, according to law firm Haynes and Boone LP’s inaugural Oil Patch Bankruptcy Monitor.

These 36 firms have collapsed owing a total of $7 billion secured and $6.1 billion unsecured debt to creditors. The total loss to creditors is an estimated $13.1 billion. 16 of this year’s bankruptcies were filed in Texas, with another six in Canada, four each in Delaware and Colorado and the rest in Louisiana, Alaska, Massachusetts and New York.

KKR’s Samson Resources, Sabine Oil & Gas and Quicksilver Resources are the three largest oil patch bankruptcy cases to take place so far this year and make up the bulk of the default total. Samson collapsed owing $4.3 billion. Sabine collapsed with $2.9 billion of outstanding debt and Quicksilver owed $2.1 billion when it filed for Chapter 11.

Oil patch bankruptcies on the rise

Haynes and Boone expects North American oil patch bankruptcy cases to continue to mount throughout the rest of this year and into 2016. Indeed, within its “Oil Patch Bankruptcy Monitor” the law firm noted, “economic indicators suggest more producer bankruptcy filings will occur before the year is out.”

Oil patch bankruptcies: More to come

Haynes and Boone’s Borrowing Base Survey (another study conducted by the law firm to assess the impact of oil prices movements on borrowing bases) shows that as a result of slumping oil prices, key players in oil and gas financing are predicting a decrease in the ability to borrow against reserves by an average of 39%.

The survey, conducted in September, showed a drastic change in mentality across the oil patch. Respondents included oil & gas executives, financiers and professional services companies. All universally agreed that the ‘wait and see’ attitude seems to have passed and has instead been replaced with the recognition that more action needs to be taken to reduce debt through equity investment, restructuring or even declaring bankruptcy.

A reduction in borrowing bases is now the single largest threat to small E&Ps going forward.

Borrowing bases are redetermined roughly every six months. Figures used by banks to calculate the value of the reserves used to borrow against are based on market oil prices. And with Haynes and Boone’s Borrowing Base Survey predicting an average cut of 39% to borrowing bases when the next round of revaluations take place, it looks as if many oil companies are going to find their liquidity deteriorating significantly going forward.

Many companies face seeing the value of their reserves falling below the amount of money they have borrowed from their bank, leaving them with a gap they have to close when a redetermination occurs. Cost cutting and a reduction in capex can help close the gap. However, most shale oil producers are faced with a Catch 22 situation. Cutting capex hurts production, which constricts cash flow and prevents explorers from developing new reserves that can be added to borrowing bases.

 

Back in September The Financial Times reported on a research note from Bank of America, which pointed out that only a fifth of “higher-quality” energy companies had used up more than half of their borrowing base capacity. For junk-rated companies, however, it’s a different picture. Citi points out that only 21% of the junk-rated energy companies it covers have any borrowing base capacity left at all.

It looks as if it’s going to get much worse for energy companies before it gets better.