The oil price crash has decimated the ranks of U.S. exploration and production companies. Unable to survive in our new world of half-priced oil, many shale drillers filed for bankruptcy protection to restructure unsustainable debt loads. But that’s not the end of the story.
Just like the surviving E&P companies that proved they are much more resilient than many -- including OPEC -- had expected, many firms that filed for court-approved debt reorganization are now emerging from bankruptcy, looking to grow.
According to law firm Haynes and Boone, since the beginning of 2015, a total of 123 North American oil and gas producers filed for bankruptcy, including Chapter 7, Chapter 11, Chapter 15, and Canadian cases. Those bankruptcy filings involve around US$79.9 billion in cumulative secured and unsecured debt, Haynes and Boone says.
According to the Financial Times, 8 out of the 10 largest U.S. exploration and production companies that had filed for Chapter 11 have come out on the other side bankruptcy and are still doing business.
While the shale drillers that stayed afloat moved on in the lower-for-longer oil prices with cutting costs, those under bankruptcy protection shed debt burdens and restructured operations, selling oil and gas assets to companies with stronger balance sheets. Thus, the shale patch slashed costs on the one hand, and had oil and gas assets sold to drillers financially stable enough to invest in developing those assets, on the other. And the shale industry proved OPEC wrong – the cartel’s attempt to drive U.S. producers out of business and profitability by flooding the world with oil failed.
Since the OPEC-and-partners production cut deal was announced at the end of last year, oil prices have found some support at around US$50, and production from the key U.S. shale plays has been rising, with additional 122,000 bpd of output growth expected in June.
Some E&P companies that have emerged from bankruptcy proceedings and restructuring are also planning to lift their output.
For example, Houston-based Halcón Resources completed restructuring and emerged from prepackaged bankruptcy in September last year, eliminating around US$1.8 billion in debt. For the first quarter of 2017, Halcón Resources returned to profit and revised up its second quarter and full-year 2017 production guidance by 1,000 Boe/d. Second-quarter output is now seen at between 33,000 and 35,000 Boe/d, and full-year 2017 production -- at 38,000 to 40,000 Boe/d.
SandRidge Energy, based in Oklahoma City, emerged from reorganization in October 2016, with US$3.7 billion of debt eliminated. In Q1 2017, SandRidge Energy booked a net income of US$51 million, versus a US$324-million loss in Q1 2016.
Ultra Petroleum said last month that it had successfully completed its in-court restructuring and emerged from Chapter 11, raising US$2.98 billion in exit financing “in order to pay creditors in full and preserve significant value for existing equity holders.”
In the Q1 results release, Ultra Petroleum’s president, chairman and CEO Michael Watford said that plans are to grow operated rigs to 8 this year, from an average 2 rigs operated for most of 2016.
“Fourth quarter 2017 production should be 25% greater than first quarter with funding from cash flow,” said Watford.
Alongside growth plans, assets high-grading and cost management are priorities for the U.S. shale patch now.
But apart from prudent cost management, the E&P companies emerging from bankruptcy will have additional pressure to cope with: the new shareholders, many of whom have become owners via debt-for-equity arrangements, will want quick performance results.
“The new owners are not going to be nearly as patient with managements as the old shareholders were,” Haynes and Boone’s Charles Beckham told FT.
The resurrected shale companies must show that they had learned from the past.
Ultra Petroleum’s CEO Watford said at the Q1 results conference call: “So in many ways, we are the same, but in other ways we are better. We are glad to be back.”
OPEC and partners are probably not so glad.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.