Bankruptcy filings by US energy producers at four-year high

Covid-19 downturn has caused debt burdens of oil and gas producers to rise, Rystad Energy says

The Gulf's energy ministers reiterated their commitment to supply cuts in an effort "to further speed up the oil market's rebalancing". Bloomberg

Bankruptcy filings by US oil and gas producers rose to a four-year high in the second quarter of 2020 due to the downturn caused by the coronavirus pandemic, according to Oslo-based Rystad Energy.

“Chapter 11 filings for US E&P (exploration and production) companies jumped to a four-year high in the second quarter of 2020, both in terms of the overall number of cases and in cases filed by companies with at least $1 billion (Dh3.67bn) in total debt,” the consultancy said in a report.

“Both in 2Q20 (second quarter of 2020) and 2Q16 (second quarter of 2016) the number of cases increased as WTI prices dropped below $40 (per barrel), causing operators with higher breakeven prices to struggle to service their debt.”

Oil prices have seen wide swings this year, mainly due to the coronavirus pandemic that reduced demand for crude while supply remained steady.

Brent, the international crude benchmark, dropped from highs of almost $69 per barrel in January to $19.33 by mid-March as demand buckled due to movement restrictions put in place to stop the spread of Covid-19. West Texas Intermediate – a blend of US crude grades – took a dive and traded briefly below zero on April 20, hitting the revenues of oil and gas producers.

Operators that survived the oil price fall in 2016 "were unable to avoid that fate this time around", according to Rystad Energy.

Some of the largest companies that have filed for Chapter 11 in 2020 include Chesapeake Energy with a debt of $9.2bn, Ultra Petroleum ($5.5bn in debt), Whiting Petroleum ($3.6bn), Denbury Resources ($2.1bn) and Extraction Oil & Gas ($1.9bn).

Chapter 11 in the US provides protection from creditors, allowing a business to restructure while remaining in operation.

The rising number of companies filing for bankruptcy has also "created opportunities for both institutional investors and supermajors to buy into discounted shale acreage", Rystad Energy said.

The US onshore market has seen 14 mergers and acquisition deals this year, with only one transaction worth more than $1bn, according to the consultancy. By comparison, there were six deals that exceeded $1bn during the first seven months last year and nine for the whole of 2019.

“Given the uncertainty and the low commodity prices in the US market so far in 2020, this could be an opportune time for asset-specific acquisitions, especially in oil basins where costs are at historical lows,” Rystad Energy’s senior shale analyst Alisa Lukash said.

“As many of the smaller operators are struggling, robust companies are well positioned to negotiate good prices when expanding their portfolios.”

The largest deal this year is Chevron’s acquisition of Noble Energy in July for a total market enterprise value of $13bn. National Fuel Gas (NFG), a New York-based company also announced plans to acquire Shell’s Appalachian acreage for $541 million.

Rystad Energy also said the external capital raised by oil and gas producers in the US reached $10.5bn so far in 2020, driven primarily by companies like EQT, Laredo Petroleum, Parsley Energy, WPX Energy, Diamondback Energy and Pioneer Natural Resources.

Oil and gas companies raised $12.6bn in debt last year.

“We expect 2020 debt issuance to surpass last year’s level during the third quarter. Capital raising remains focused on debt refinancing and support for restarting drilling programmes,” Ms Lukash said