Longtime Houston bankruptcy attorney Charlie Beckham at Haynes and Boone lays out the landscape for the avalanche of Chapter 11’s expected in the oil industry thanks to the recent slide in commodity prices.
Charlie Beckham has been in the energy bankruptcy business a long time – long enough to remember the oil bust of the early 1980s, when he was cutting his teeth as a young lawyer at Kemp Smith in El Paso. Over the years, including 20 at Haynes and Boone in Houston, he’s helped his clients reach positive resolutions in a range of transactions involving ATP Oil Inc., Lothian Oil Inc., Tri-Union Development Corp. and even Enron Corp. He’s also advised parties in bankruptcy cases involving Hercules Offshore Inc., C&J Energy Services, Dune Energy Inc., Linn Energy, Berry Petroleum, Memorial Production Partners, Breitburn Operating, Vanguard Natural Resources, Chaparral Energy, Sabine Oil & Gas and Paragon Offshore.
The Texas Lawbook’s Claire Poole spoke with him Thursday about the current oil bust, how it compares with previous ones and his expectations for what’s to come at a time when the coronavirus is complicating matters.
Q: It’s certainly an interesting time.
A: It is. I was at a confirmation heating this morning, in Judge [David] Jones’ court, and one of the more interesting things to watch was how people greeted each other: handshake, elbow bump or just leaning backwards.
Q: So what did you observe?
A: It was about a third, a third, a third. I’ve decided to do the elbow bump now. A lot of people were freely shaking hands but some people didn’t want to be close to anyone.
Q: Which case was it?
A: It was McDermott.
Q: The reorganization plan was confirmed today.
A: Yes, the plan was confirmed today, and part of the evidence – this is going to be evidence in any of the energy-related cases going forward – is this new decline in energy prices going to have an impact on the feasibility of a company to win confirmation. Last week, in the EP Energy case, Judge [Marvin] Isgur was curious about the impact of the slipping energy prices and it got confirmed.
Q: Those are two busy judges?
A: They are very popular right now. It’s because of their energy backgrounds and the geography of where these companies are. Houston is ground zero for any significant cases.
Q: Are you seeing much in the western district?
A: I’m not, which is surprising to me. I contrast that with the last similar bust like this, in Texas in the 1980s. So many of the cases got filed in Midland in the western district. This dramatic drop does remind me – because i’m a little long in the tooth – of the price declines in 1985.
Q: It started in 1982, didn’t it?
A: Yes, it started in 1982. Oil was probably around $38 per barrel, and when the rig count started to decline, oil went down incrementally. So from late ’82 through early ’84, it dropped into the $20’s, and then in late 1984, oil went down to $9. I was a young lawyer then. I didn’t intend to be a bankruptcy lawyer, but bankruptcy found me.
Q: How is this similar to 1980s?
A: The oil war between the Saudis and Russia, and for the Saudis to say, “We’re just gonna open up the spigot and put much more crude into the market.” This is a commodity business; it has always been dictated by supply and demand. They have a valve for supply but not for demand. The combination of OPEC and the Russians deciding to open up the supply side simultaneously with this devastating drop in demand from the coronavirus have driven the commodity price way way down. Hopefully it will come back up, but I wouldn’t be surprised if it dropped into the $20’s.
Q: So are you hearing from clients?
A: I’ve fielded a few phone calls.
Q: So what are you seeing right now?
A: We’re seeing a couple of things. For any company currently in Chapter 11, which signals it has some inherent weaknesses, there’s no exit. It’s like you’re in a burning building, and the fire escape has closed, and there’s no exit because there’s insufficient liquidity to get to a successful reorganization – and capital markets have shut down. So to get financing to exit and even attempt to sell assets is tough, really tough.
Q: McDermott got their restructuring through?
A: If you look at the transcripts of hearing, one of the points they made about their feasibility is that they have zero exposure to the U.S. shale industry. They are mostly a construction company and global with longer term contracts. Others are going to have more trouble.
Q: So what are you telling clients?
A: It’s a dynamic world, and when prices change like this so dramatically, it will create opportunities to make folks interested and will make properties attractive and present potential restructuring opportunities. The industry is not going to go away. The ownership of the assets may change hands, but the oil is going to continue to flow, just at lower prices. A little creativity can create some opportunity for different constituencies.
Q: Is private equity interested?
A: No. They’re scared to death. They’ve been burned before.
Q: How about, for lack of a better term, vulture funds?
A: They’ve been burned as well. It’s difficult to find anyone interested in the industry. It’s going to be people who have money in their pockets who don’t need substantial financing and believe in the long term view that commodity prices will go up. And they will; i just can’t tell you when.
Q: Maybe wealthy individuals and family offices could jump in?
A: Family offices could be a real player. A lot of the family offices in Texas originally made their money in the oil industry. And I think there are bargains out there right now.
Q: So what should distressed companies and their in-house counsel be doing?
A: Look at ways to manage their liquidity by reducing expenses and trying to survive through the short term. Keep their core group of employees together as best they can to manage through the crisis. This is a bad storm.
Q: I’ve heard some are considering taking down what’s left of their credit facilities?
A: Not many have anything left on their facilities. It’s not like 2015; they’re either fully drawn down or there are holes in credit agreements that will get plugged. There were too many folks who were burned last time.
Q: So will the banks end up owning oil and gas companies?
A: Banks don’t want to. Many converted their debt to equity the last time, leaving RBL’s [reserve-based lending] unimpaired and in place. At $30 or $32 oil, I’ll say $32 oil, there are a number of RBL’s that are impaired with no ability for the borrower to cure the default.
Q: So spring redeterminations will be bad?
A: Yes. This price decline hits right at the wrong time. Haynes and Boone has its survey out right now and it will be released in April. I think it will be devastating.
Q: How soon could the avalanche of bankruptcies happen?
A: With prices this low, it will trigger panic among creditor constituencies and liquidity will be impacted immediately. Sitting here today, they received their runs at $40 [oil] last month. It’s going to impact liquidity in April and May.
Q: Will bankruptcies snowball after that?
A: It depends on commodity prices, whether they come back, whether the Russians blink. You can’t keep this much supply on the market.
Q: Could alternative financing sources help?
A: Alternative financing, drillcos and things like that, it depends on whether those opportunities are still out there. It will be something oil companies may look to, but it doesn’t always put money in their pockets immediately. Some companies will need immediate relief.
Q: How will oilfield services companies fare? I saw that you’re involved in the Pioneer Energy bankruptcy.
A: So far, Pioneer looks okay. But yes, oilfield service providers be affected. Companies are going to cut back on $30 oil, cut back on capex. That will impact all the oilfield services companies.
Q: Will those bankruptcies be further down the road than the exploration and production companies?
A: Certainly during 2020.