The record drop in oil prices over the last six months has consumers – and some investors – cheering. Optimists believe that the economy is ripe for a boost as would-be shoppers earmark their extra cash to spend on anything from dining out to apparel.
While shopping sprees may prop up some economic segments, there’s a darker side to the oil price plunge. Dozens of small oil and gas exploration and production companies in US regions like the Bakken formation and Permian basin collectively took out tens of billions of dollars of debt in recent years – predicated on the assumption that US$100 per barrel oil was here to stay. Those highly levered capital structures are already starting to crack, as earnings slow down and the cost to drill doesn’t justify the revenue that the oil brings in.
A handful of the high-cost, debt-saddled exploration and production companies have already hired restructuring advisors and in a few cases have pulled the trigger and filed for Chapter 11.
Quicksilver Resources, for example, filed for bankruptcy last week after a nearly two-year auction process ended in a bust. The company already faced looming debt maturities and a dwindling cash balance as of last fall, and the oil price drop hastened its day of reckoning. Saratoga Resources skipped two December interest payments on its debt and, along with advisor Conway MacKenzie, has entered restructuring talks with lenders.
But many operators now staring down a shortened liquidity runway didn’t see this coming a year ago.
Among those, Samson Resources and its owner, KKR, hired turnaround advisors at The Blackstone Group and Alvarez & Marsal to assist in negotiations with holders of its US$3.8 billion in debt, Debtwire first reported on February 20. The oil price decline cut short Samson’s timeframe to evaluate acquisitions or asset sales that could have provided liquidity and growth opportunities.
Meanwhile, Midstates Petroleum hired law firm Kirkland & Ellis to help review options for improving its balance sheet and liquidity. The announcement followed its February 10 statementthat it had engaged Evercore Partners for strategic alternatives.
And Sabine Oil & Gas, less than six months after its acquisition ofForest Oil, is working with financial advisors Lazard and Zolfo Cooper, as well as Kirkland & Ellis, on alternatives for its capital structure.
“Most of these companies wouldn’t need advisors had oil prices remained high,” said an investor who buys the bonds of highly levered energy companies.
Development costs for US shale producers vary in different regions, generally ranging betweenUS$50-US$60 per barrel. Meanwhile, oil futures for May delivery trade today at US$50.68 per barrel.
While restructuring professionals have been on the prowl for distressed E&Ps since the oil plunge began last year, the flurry of recent mandates is no coincidence. Most operators have loans with the borrowing capacity tied to the value of their oil and gas reserves. The loan capacity is “redetermined” several times per year, so if the reserve value declines, the more cash-strapped borrowers will face reductions they can’t afford. Many operators face redeterminations in April.
Some oil producers are trying to sell assets, but in such a depressed price environment, they’re unlikely to get anything better than fire sale prices.
“If you are relying on an [M&A] transaction to solve a maturity problem, or a cash flow or liquidity problem, it’s a high-risk strategy,” said Jim Parkman, founder of energy-focused investment bank Parkman Whaling. “You really don’t have a lot of certainty in this environment that you’ll have a buyer.” – Forbes