After two years of fewer bankruptcies, the oil and gas exploration and production sector is seeing an uptick in filings due to pressured commodity prices, according to a report released Thursday by Dallas-based law firm Haynes and Boone.
So far this year, there has been an increase in Chapter 11 filings to 33, versus 22 around this time last year, with 27 occurring since the beginning of May and seven since the firm’s Aug. 12 report.
The firm cited the likely causes as natural gas and natural gas liquids prices continuing to remain depressed. It also noted that the Nymex 10-year strip for oil was still showing prices in the lower $50’s per barrel at the end of September despite elevated levels in the upper $50’s following the Sept. 14 attack on Saudi Aramco’s oil facilities.
“This increase in year-over-year filings indicates that the reverberations of the 2015 oil price crash continue to be heard in the industry,” the firm said in the release.
Since Haynes and Boone began tabulating the data in 2015, 199 producers have filed for bankruptcy with $108.9 billion in debt. The initial wave came between 2015 and 2016 with more than 100 filings followed by a substantial decrease in 2017 (to 24) and in 2018 (to 28).
Texas has by far seen the most bankruptcies since 2015 at 89 totaling $57.4 billion in debt followed by 13 in Delaware, 11 in Colorado and Lousiana and 9 in New York. Canada has experienced 18 filings.
Oilfield services, or OFS, companies also have seen a steady rise in bankruptcies since 2015, with the number of filings reaching 180, mostly in Texas, the firm found.
The midstream sector hasn’t suffered the same level of distress experienced by E&P or OFS companies, with 28 midstream companies carrying $21.3 billion in debt having filed for bankruptcy in the U.S. since 2015, including 11 in Texas and 7 in Delaware.
Haynes and Boone also reported results of its fall 2019 borrowing base survey, with the majority of respondents predicting a decrease in credit available for producers – the first time since 2016.
About 40% of respondents expect borrowing bases to decrease by 10%, compared with 40% in the firm’s spring 2019 survey saying they expected borrowing bases to remain the same.
“The fall borrowing base survey clearly indicates that reserve-based loan capital is becoming constrained,” Kraig Grahmann, head of Haynes and Boone’s energy finance practice group, said in the release. “E&P companies will remain boxed in on capital sources for a while.”
In response to questions from The Texas Lawbook, Grahmann said in an email that the tightening of reserve-based lending, or RBL, capital will be a challenge to upstream oil and gas companies, as it’s usually the cheapest form of capital available to them. “It carries a significantly lower interest rate than other types of debt,” he said.
Grahmann also noted that many companies are already very drawn on their RBLs. “So if their borrowing base (i.e., their credit limit) decreases, their ability to draw cash for expenses and operations will be limited,” he said.
The survey also showed that there is strong interest in alternative capital sources that are filling the void with debt financing, Grahmann said.
“The percentage of respondents seeing debt from alternative capital providers as a primary source capital has doubled since spring 2019,” Grahmann said in the release.
Respondents also reported higher hedging levels than in previous surveys, indicating that producers are more focused on reducing commodity price risk. They also expect producers to use cash flow from operations and bank debt as their primary sources of capital in 2020, with the vast majority believing that it will be 2021 or later before producers will have access to equity capital markets.
Haynes and Boone also surveyed energy lenders on commodity prices and found that they expect a slight 1.4% drop in oil prices and a 6.5% decrease in gas prices on average from last spring’s price decks.