Report warns of growing oil bankruptcies

Oil and gas bankruptcies spiked from April to June, reaching their highest level in a quarter since the 2016 oil crash, according to a new report.

The analysis from law firm Haynes and Boone LLP on Friday said the filings from 18 companies represent a combined total of $29 billion in debt. By comparison, only five companies declared bankruptcy in the first quarter of 2020.

In the last week of June alone, three companies made filings, including shale giant Chesapeake Energy Corp., noted Kraig Grahmann, chair of the energy and finance practice group at Haynes and Boone.

“We definitely expect it to keep picking up over the course of the year,” Grahmann said.

As with other oil and gas companies, the coronavirus pandemic hit Chesapeake hard, exacerbating company debt troubles (Energywire, June 29).

Most companies with high levels of debt are likely to require restructuring through bankruptcy courts in the coming months and years, Grahmann said. In the second quarter, the majority of oil and gas bankruptcies were filed in the U.S. District Court for the Southern District of Texas in Houston, a major hub for U.S. oil headquarters, according to the report.

“Most of the companies filing have a venue basis for being in Houston, and they sort of like the predictability of those judges. They have a better feel for how they’re going to roll and what that venue is going to be like,” Grahmann said.

Oil demand plunged earlier this year as U.S. states and countries around the world instituted stay-at-home orders and travel restrictions, causing the price of oil to fall to nearly $20 per barrel in April. While the price of oil is now hovering around $40 per barrel, that is still too low for many shale companies to continue producing, Haynes and Boone said.

In addition, even though oil demand has picked up slightly, that is unlikely to continue given that the number of new COVID-19 cases in the United States and some other countries has climbed in recent weeks, the Houston-based firm said.

“Until full economic activity returns and consumer confidence that the worst of the pandemic is behind us, demand levels will not pull up prices,” the report said. “Lower for longer remains the watchword for producers and their creditors.”

A separate report released Friday from the International Energy Agency, however, estimates that the pandemic’s most devastating impacts on oil demand have already happened. The agency found that declines in global oil demand in the second quarter were “less severe than expected” and that demand will be higher on average in the second half of 2020.

Nonetheless, the IEA report also cautions that oil prices and demand could crash again if the number of new COVID-19 cases continues to increase in some countries.

“While the oil market has undoubtedly made progress since ‘Black April,’ the large, and in some countries, accelerating number of COVID-19 cases is a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside,” IEA said.