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Bankruptcy Filings Rise Among US Energy Producers, Report
Bankruptcy Filings Rise Among US Energy Producers, Report
According to a new report from law firm Haynes and Boone LLP, bankruptcies in the upstream sector are increasing this year as energy spot prices remain subdued amid a cyclical downshift in the economy.
So far, 26 exploration and production (E&P) firms have filed for bankruptcy through mid-August, with debts totaling $10.96 billion. The firm noticed a surge in bankruptcies began in May, following a -23% correction in WTI prices from mid-April to mid-June.
In 2018, 28 E&P firms filed for bankruptcy, posting $13.2 billion in debt, while 24 firms asked for protection in 2017 with $8.5 billion in debt. The firm points out that insolvencies in the energy patch are gaining momentum.
“So far this year there has been an uptick in the number of filings,” Haynes & Boone said.
Oil and gas prices have remained depressed for 2019.
The law firm said it’s hard to tell if a new bankruptcy wave is imminent, but said, “some stakeholders may have given up hope that resurgent commodity prices will bail everyone out,” especially operators who have been on the verge of bankruptcy.
“For these producers, the game clock has run out of time to keep playing ‘kick the can’ with their creditors and other stakeholders,” the firm warned.
Buddy Clark, a Haynes & Boone partner, told Reuters that many of 2019’s bankruptcies are pre-planned, Chapter 11 restructurings, where creditors agree in advance on restructuring plans.
“I don’t think you will see a lot of Chapter 7 (liquidations),” he said. “When you see Chapter 7s is when there are no assets left. Typically, there are always assets left.”
Natural Gas Intelligence believes a bankruptcy wave for the upstream sector could be nearing. This is because operators across the country have been scaling back since oil crashed -44% in 4Q18. Producers have been faced with margin compression, high debt loads, and oversupplied markets so far this year.
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Poor Quarter for Canada’s Oilfield Services
Poor Quarter for Canada’s Oilfield Services
It was a jungle out there for the Canadian oilfield services (OFS) industry in the third quarter of the current fiscal year ended September 30, 2015. For a group of 25 diversified, publicly traded Canadian OFS companies, combined revenue declined 38.5 percent from $6.6 billion in 2014 to only $4.0 billion this year.
Just one company, ShawCor, managed to increase revenue on a year-over-year basis. Average gross margin – revenue minus direct expenses for delivering the product or service – fell 6.6 percent from an average 27.0 percent last year to 22.3 percent this year. Only eight of the companies reported a profit for Q3, compared to 2014 when 24 of the 25 companies under review reported a profit in the same three month period. Two companies reported losses close to or exceeding total revenue because of write-downs of balance sheet assets, particularly goodwill.
Gross margin is a key performance indicator of the health of the OFS sector and the companies which operate in it. This is revenue minus direct expenses or cost of goods sold. The main components of direct expenses are cost of goods for products, fuel and labour for services, expendables, repairs and maintenance, field service operations and operations support infrastructure. Changes in the gross margin reflect pricing pressure from clients, as well as input costs such as parts, expendables, fuel and labour.
That revenue should decline this sharply on a year-over-year basis should come as no surprise. With oil prices down by half, drilling is down by half, the rig count is down by half and capital expenditures have fallen accordingly. Exploration and production (E&P) companies have told their shareholders they are enjoying service price reductions in the range of 15 percent to 25 percent across the board. The fact the average gross margin for the 25 companies under review is down on average only 6.6 percent in the face of intense competition and pricing pressure is a testament to the ability of managers to find ways to cut product and service delivery costs to accommodate customer demands for lower prices.
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