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Tuesday, November 24, 2020

Largest number of bankruptcy filings in modern history in play as US upstream industry braces for impact

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Whiting Petroleum this week opened the door of Chapter 11 filings but will not be the only company to cross that threshold. As the US upstream industry is heavily indebted, the current price environment is likely to create the largest number of such filings in modern history in 2020, a Rystad Energy impact analysis shows, with more than 70 oil and gas operators expected to be in trouble to meet interest payments at an oil price of $30 per barrel of WTI crude.

As the Covid-19 pandemic and the global oil-price war continue to put pressure on oil prices, the number of Chapter 11 filings could further climb into triple digits with 150 to 200 cases in 2021 if a price level of $30 WTI persists.

In a $20 WTI environment, which is close to where we are right now, the number of Chapter 11 cases could reach 140 already this year, increasing to almost 400 in 2021. In such a scenario almost $250 billion of debt is seen at risk in 2020‒2021. To be exact, our estimates show $70 billion of debt being at risk in 2020 and another $177 billion in 2021.

“In our view we will need WTI prices of $40 to $45 per barrel to eliminate the upcoming explosion in the number of financially distressed US E&Ps, while the most efficient and least leveraged players will still be able to survive with oil prices below $20 per barrel WTI,“ says Rystad Energy’s Head of Shale Research Artem Abramov.

The oil and gas operators in the US, including producers of all sizes, amount to just above 9,000. The number might seem high but most of these operators represent small, family-owned businesses operating a single-digit number of wells. The share of supply controlled by the top 10 operators was 32% last year, while the share of supply controlled by the top 50 operators stood at 69%.

Historical data from Haynes and Boone show that the number of Chapter 11 cases was 44 in the first year of the previous downturn and increased to 70 in 2016 when WTI oil prices were below $30 in the beginning of that year, even though a new boom began in the second half of 2016.

Chapter 11 filings slowed to 24 in 2017 and 28 in 2018 (about two Chapter 11 cases per month is a normal rate during the upturn). Last year we saw a 50% increase in the number of Chapter 11 cases, while total debt across these cases doubled between 2018 and 2019. This was largely driven by a handful of Chapter 11 filings with debt in excess of $2 billion: EP Energy, Approach Resources, Legacy Reserves and Sanchez Energy.

As of December 2019, Whiting had close to $2.8 billion in notes/bonds with maturities up until 2026, with $262 million coming due in 2020 and almost $800 million in 2021. The operator also had scheduled interest payments of more than $260 million in 2020–2021, which is the fundamental reason behind the capital restructuring decision.

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