35% Of Public Oil Companies Could Face Bankruptcy

By Irina Shav, a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice

More than one-third of public oil companies globally face bankruptcy, according to a new Deloitte report that paints a fairly gloomy picture of the U.S. shale patch as it struggles to survive under mountains of debt.

The Deloitte report—the first high-profile report on the current financial situation of global oil and gas companies—surveyed 500 companies and found that 175 are facing “a combination of high leverage and low debt service coverage ratios”.

“[…] nearly 35 percent of pure-play E&P companies listed worldwide, or about 175 companies, are in the high risk quadrant,” Deloitte noted, adding that the situation is “precarious” for 50 of these companies due to negative equity or leverage ratio above 100.

“Stock prices of some of these has already dipped below $5, making them penny stocks. The probability of these companies slipping into bankruptcy is high in 2016, unless oil prices recover sharply, a large part of their debt is converted into equity, or big investors infuse liquidity into these companies.”

Reports about the growing numbers of bankruptcies among U.S. shale producers aren’t new, but the Deloitte findings reinforce the picture.

“More than 80 percent of U.S. E&P companies who filed for bankruptcy since July 2014 are still operating (Chapter 11) under the control of lenders or the supervision of bankruptcy judges,” according to Deloitte.

“However, the majority of these Chapter 11 debt restructuring plans were approved by lenders in early 2015, when oil prices were $55-60/bbl. Since then, prices have fallen to $30/bbl, and hedges at favorable prices have largely expired, making it tough for existing Chapter 11 bankruptcy filers to meet lenders’ earlier stipulations and increasing the probability of US E&P company bankruptcies surpassing the Great Recession levels in 2016.”

Shale producers amassed huge debts that they are now struggling to service in the oil price downturn.

According to AlixPartners, these debts totaled $353 billion for U.S. and Canadian energy companies at end-2015. To compare, Deloitte puts the combined debt of those 175 bankruptcy-threatened companies at more than $150 billion, nearly half of the total for US and Canada.

That’s a lot of debt that needs servicing or restructuring. Unfortunately, things in the industry are so bad that the usual solutions don’t work as effectively as they normally would. For starters, demand for E&P assets is at best moderate. Then there are the banks, which used to have a soft spot for energy companies when oil was selling for over $100 a barrel. Now that it is hovering around $30, the soft spot is gone and lenders are trimming their energy investment portfolios.

Private equity firms are one alternative source of finance for the troubled industry players. Deep capex cuts are another. The efficiency of both options, however, is questionable. Banks, the IEA, and the IMF have warned that oil prices could reach $20. Iran is back on the international market and planning to raise production to pre-sanction levels (around 4 million bpd in 2011.). The world’s number one and two producers, Russia and Saudi Arabia, have made a deal to freeze output at current levels, but these levels are record-highs for both countries, so a freeze is unlikely to take care of the glut quickly enough. And it’s not going to happen anyway.

All this spells doom for that unfortunate one-third of producers. There is one alternative to bankruptcy—sector consolidation—although the problems with consolidation are similar to the problems with asset sales. Few energy companies are in a position to make acquisitions right now.

What’s left? Continuing the optimization of everyday operations. Operating efficiencies are constantly being improved, mainly in the shale patch but also outside it. Costs for 95 percent of U.S. output have fallen below $15 a barrel, says Deloitte. It seems all that is left for the troubled E&Ps is to continue pumping and keep hoping the storm will eventually subside. Not a fascinating prospect, by all means, but the most realistic one.

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21 comments

  1. James Levy

    Cost for shale oil production $15 a barrel? That’s roughly the cost of pumping light sweet crude in Saudi Arabia, the lowest cost producer out there. Sounds like nonsense to me.

    They are waiting for the big bailout after the election, just like the S&L crooks, but this time without 600 of them going to jail and the rest taking the haircut of the century.

    1. tegnost

      I’m wondering what the impact on these new nat gas terminals will be with a decimated fracking industry. I got a laugh out of NBR last night, they said it was good news that less inventory came into storage last month, um when the tank is full you can’t put any more in there……I agree with you that oil won’t go to zero, one of the industry analysts referenced the deloitte report and based on it called the bottom 18. Cheapest gas in sd 2.29, most expensive by airport 3.49! Also, I don’t see Iran not putting their oil on the market, they need the dough, too

    1. smuprhy1

      Most likely. And because the drilling, fracking and exploring was debt financed the producers have to keep pumping as long as the price is above their marginal cost because they have to make those monthly payments. So all these debt financed drillers are going to flood the market trying to stay solvent until they all go bust.

  2. Steven D.

    Since the fossil fuel industry are big backers of the Republicans, this should present an opening to the Democrats to do something significant about global warming. If they actually gave a damn and weren’t in the tank themselves.

    1. polecat

      OK……Who’s gonna be the FIRST on this board to ditch the car, plastics, heating fuel, modern agriculture, etc., etc ??….. come on……lets hear it !!

      1. Andy

        Actually I would love to live the life of an Afghani, Tibetan, or rural anywhere.
        Of course not now in the age of the “Drone”.
        I find it disillusioning that the world would want to emulate this place, it ain’t that great.
        Case in point Eire.
        I think they sold their soul for big screen T.V.’s, and full size refrigerators.
        Sad.

  3. Chauncey Gardiner

    Secondary indirect effects are also of concern. Related exposures of the TBTFs and large shadow banks to the oil and gas sector, including derivatives, are opaque. Couple these developments with volatile price fluctuations in major currencies, declining prices of many other commodities, and the interconnected nature of these systemically important financial institutions, and one hopes their risk management and internal controls are adequate.

  4. dee preston

    This news actually makes me happy. Just praying it puts frackers out of business. They want to frack in the everglades for Gods sake! We cannnot allow this to happen and now with all of their leverage you have to know they will cut corners. Just not in the everglades!! Its like when congress is on break, the only time they are not scheming to distroy anything else. I hope they all file BK. Not 11 but 7!! Thank God for something these horrific daze!

  5. Damian

    The $15 per barrel operating cost doesn’t matter, even if it is true – the core analysis is the decline curve for Shale is very steep – more than 90% decline after 40 months – by the time the price recovers the active reserve assets remaining – no matter what the asset discount for bankruptcy – leaves little for a prize. Once these wells are put on a pump the deeper the well the more operating cost with low volumes to cover the cost.

    The losses will be catastrophic to include the banks.

    In 86′ oil went from $42 at the top to $9.60 / Bbl. at the bottom – the see thru buildings from Tulsa to Houston lasted for a long time since there were no tenants for the space – even the law firms went off the air !

  6. Oil Dusk

    The problem in this current situation is that we are a capitalistic country trying to function in a cartel world. In the good old days the Texas Railroad Commission set world oil prices. Now it’s being done by players that are solely focused on their own self interests and players that are very short sighted.

    OPEC tripled the price of oil between 2000 and 2010. They then held the price level. The marginal price for oil was low and the additional portion of the price was essentially a kicker for their government revenues. The problem was they got too greedy and set the price too high (had they set the world price at $85 instead of $100, we likely would have avoided the latest boom/bust cycle).

    The capitalistic market saw these high prices and realized that they could make money at the prices that OPEC was charging the market. In other words, the marginal cost for new oil prospects was less than the artificial press levels that OPEC was setting. The result was predictable, though partly driven by technology and fracking.

    Marginal players, like the oil sands and deep and remote large scale oil and gas projects were put into motion. The oil shale players were also put into motion, and they added about 3 million barrels of oil per day out of about 92 million bopd. Other players, like Iraq also increased their production.

    When OPEC started feeling squeezed, they threw the kitchen wrench in and tried to hurt all the other players in the market. In economics, this behavior is often either referred to as “dumping” or “predatory pricing”.

    So, our domestic oil and gas production industry, to include a lot of US manufacturing jobs, is being directly attacked by foreign countries that are trying to hurt our U.S. industry so they can jack world prices up to higher levels.

    So, those of you that are reveling in the current tough circumstances of our oil and gas industry at these price levels, please realize a few things.
    (1) OPEC really wants prices back at the high levels they have enjoyed recently. These low prices will not last.
    (2) OPEC has already managed to disrupt the longer term pipeline of oil projects – meaning that the future oil supply over the next five years will be less than it would have been – which will likely have a negative impact on world GDP.
    (3) Our oil industry has made great strides in lowering costs and making unconventional oil shale projects more competitive.
    (4) Our government has done very little to support our cause of maintaining U.S. oil production. We currently produce about 9 million barrels a day (down from about 9.5 million bopd recently) at a time when we consume 19 million bopd as a country. While these extra imports we’re now being asked to cough up are cheap now, they will not be so cheap when OPEC jacks world oil prices higher again.

    Here’s how we can fight back. President Obama wants an oil tax, then give him one. Impose a windfall tax on imported oil at $60 a barrel. This will cause higher gasoline prices now, but will forestall much higher gasoline prices in the future. Domestic producers will immediately get a $60 oil price for their output. This will stop the Saudi’s and Russians from being able to deliberately destroy an industry in our country and allow us to create some employment stability for a home grown industrial sector. The additional production in the U.S. will also make it more difficult for OPEC to screw us later when oil prices soar again.

    1. sunny129

      Guess, you work in and or for the OIL industry.

      Some of this misery, is self inflicted along with the complicit of Fed encouraging animal spirits of ‘wildcatters’ with cheap credit expansion since ’09! Lot of mal-investments are made all over just like in China. Karma is getting back it’s bite!

      Debt-Fueled Boom
      The U.S. shale boom was fueled by junk debt. Companies spent more on drilling than they earned selling oil and gas, plugging the difference with other peoples’ money. Drillers piled up a staggering $237 billion of borrowings at the end of September, according to data compiled on the 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. U.S. crude production soared to its highest in more than three decades…

      http://www.bloomberg.com/news/articles/2016-02-25/biggest-wave-yet-of-u-s-oil-defaults-looms-as-bust-intensifies

      1. polecat

        to paraphrase B. Dylan; ‘who don’t we all throw stones’

        Everybody doin their 2 minute hate… am I right ??…………we’re all stuck in this energy quagmire,…and yes, the undesirable effects of fracking are now being felt, but we all utilize products or transportation that relies on petroleum, like it or not !! Getting away from that energy source basically means living a much reduced lifestyle !! who’s willing to give up even, say 50%, of their energy usage to eliminate petroleum use completely, because wind and solar currently do not scale, if they ever will !!

        1. tegnost

          actually the undesirable aspects of fracking have been IGNORED, until now when it may affect the wealthy and the banks…we utilize products and transportation that is heavy on petroleum because that make banks and oligarchs a lot of money, and they’ll kill public transportation to get moar. I do not plan to have another car and the GFC reduced my consumption significantly, probably more than 50% because my truck was a ’56 GMC half ton, and rather than the ACA I just plan to go die when the time comes, and live the best life I can until then.

      2. polecat

        to paraphrase B. Dylan; ‘who don’t we all throw stones’

        Everybody doin their 2 minute hate… am I right ??…………we’re all stuck in this energy quagmire,…and yes, the undesirable effects of fracking are now being felt, but we all utilize products or transportation that rely on petroleum, like it or not !! Getting away from that energy source basically means living a much reduced lifestyle !!… Who’s willing to give up even, say 50%, of their energy usage to eliminate petroleum use completely, because wind and solar currently do not scale, and may never do so !! …….and consider this: even if renewables achieve parity with gas & oil, you would still need more resources than the planet can provide, to give 6+ billion people the middle class lifestyle that western culture provides its’ citizenry!

        1. tegnost

          trees don’t grow to the sky. There is a maximum volume of humans that the planet will tolerate, and we seem to be fixated on finding out what that number is.

          1. tegnost

            …and not to be too much in your face sorry but it’s probably easy to knock off 50% of petroleum usage in the same way that I have for most people, and I agree petroleum serves a mighty purpose in our situation as it is

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