Left out of rescue bills, smaller oil firm bankruptcies surge
Demand is inching up as economies reopen, but jitters over a fall surge remain
Oil allies in Congress appear to have eased pressure on the administration to help the struggling industry as states start to reopen and help increase demand.
Still, the number of oil industry bankruptcies jumped in the second quarter of this year and many more are expected, a sign that earlier efforts by lawmakers and the recent rise in prices haven’t been enough to relieve the distress in the industry.
Even though demand is picking up as economies start to reopen, a recent rise in coronavirus cases across the globe and in several states has the industry on the edge and could further slow its recovery.
As he pushed for help, Sen. Kevin Cramer, R-N.D., said he worried that struggling independent domestic oil producers could be gobbled up by larger multinational corporations.
[Lawmakers find markets mean more than policy in oil industry]
All the companies that have filed for Chapter 11 bankruptcy since the coronavirus pandemic started to take hold of the U.S. economy have been independents. They typically focus on a specific area of oil production and are smaller in size and revenue than integrated companies such as ExxonMobil Corp., Royal Dutch Shell PLC, and Chevron Corp., which are involved in the entire chain from drilling, transportation, refining and retail sales.
“Smaller oil company bankruptcies have been a concern since the beginning of the COVID-19 pandemic, especially with the global oil price war caused by Saudi Arabia and Russia,” Cramer said in an emailed response to questions. “Over-consolidation will not serve North Dakota or domestic energy development well.”
Whiting Petroleum Corp., which describes itself as “one of the largest” independent exploration and production companies in the U.S., filed for bankruptcy reorganization on April 1, among the first and highest profile producers to do so in the COVID-19 era. The company’s value fell to around $32 million from $15 billion in 2011, according to Reuters.
Haynes and Boone LLP, which monitors bankruptcies among North American oil and gas producers, said at least 13 oil producing companies filed for bankruptcy from April to the end of May, up from five in the first three months of the year.
Several more companies have filed for bankruptcy reorganization since the firm’s latest update released May 31, said Kraig Grahmann, a partner and head of Haynes and Boone’s Energy Finance Practice Group.
“We certainly expect the pace to continue picking up through summertime and really through the end of the year,” Grahmann, who has been involved in some of the latest bankruptcies, said.
He said based on the pace of bankruptcies, it's likely there will be a higher number this time compared to the 2015-2016 oil price slump. “It’s going to be higher volume, we think, and it’s going to be more painful bankruptcies as well.”
Denver-based Extraction Oil and Gas Inc., and Chisholm Oil and Gas Operating LLC last week joined the growing list of companies that have filed for bankruptcy.
“Make no mistake, the sector was in a bit of a pickle coming into 2020 anyway, and this is not universal for all firms by any means, but there were companies … particularly in the shale patch that were under pressure because they had not really generated much free cash flow for the last decade, and investors are starting to look very unfavorably at that space and in many instances capital just wasn't available,” said Ken Medlock, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
“And I don't think that we're finished yet by any means,” Medlock said. “But the companies that weather this are going to weather it because they have demonstrated capital efficiency, they've demonstrated operational efficiency, and they have assets.”
Many more companies are on the brink. California Natural Resources, Callon Petroleum, Chaparral Energy, Denbury Resources and Chesapeake Energy are on the “death watch,” according to Forbes.
“Energy-related bankruptcies mean fewer jobs and fewer suppliers of secure, domestically produced energy,” Grace Jang, a spokesperson for Sen. Lisa Murkowski, R-Alaska, told CQ Roll Call.
She said Murkowski has sought to ensure that all sectors, including oil companies, are eligible for economic relief aid that Congress has passed.
The industry was already grappling with a supply glut, but the global health crisis exacerbated its problems by suppressing demand by nearly 30 percent, according to the International Energy Agency. The oversupply pushed prices below zero for the first time in history and left producers short of storage for their excess crude.
There was little to be done legislatively. Still, oil-state lawmakers pressured the administration to intervene, including by offering to lease storage in the Strategic Petroleum Reserve. They succeeded in pushing the Federal Reserve to broaden the terms of its Main Street Lending Program, making it possible for some oil companies to qualify for coronavirus relief money.
They also threatened Saudi Arabia with sanctions and withholding of military aid and pushed the administration to coax that country and oil-producing nations to agree to cut their output.
Murkowski suggested that the government can take additional steps to help by buying oil at low prices for the SPR. But lawmakers have so far been unable to move legislation that would provide $3 billion for the Energy Department to make such a purchase.
The storage problem appears to have eased with lower production and an uptick in demand. And at around $40.15 a barrel Tuesday afternoon, prices are up significantly but still remain well below their $63-per-barrel price at the beginning of the year, leaving the industry on edge.
Bjornar Tonhaugen, head of oil markets at research firm Rystad Energy, said in a Monday email that the risk of an upsurge in coronavirus cases is “omnipresent,” meaning recovery of the oil markets “all hangs in the thread” of avoiding a second round of serious lockdowns.