Oil and gas industry bankruptcies accelerated in 2019, and while they may not continue on an upward trajectory in 2020, they probably won’t be heading down either.

Oil and gas companies brought $34.96 billion in debt to bankruptcy courts in 2019, more than double the $17.12 billion they brought in 2018, according to a report published by Haynes and Boone LLP. And this latest wave isn’t over yet, said Charles Beckham, a Haynes and Boone partner.

“I wouldn’t say I’m anticipating an increased pace in the number of bankruptcies in 2020, but I would anticipate a similar pace,” Beckham said. “We have not seen the end of this.”

Shifting investor expectations have put a lot of pressure on energy companies, especially those in the upstream business: oil and gas producers and their equipment and service providers. Investors aren’t as interested in growth anymore — they want to see more free cashflow, said Buddy Clark, another Haynes and Boone partner.

That shift, combined with low oil prices and large amounts of debt taken on to fund growth when the market was more optimistic, has led to the resurgence of bankruptcies.

Looking ahead, market participants have stopped depending on promises of stronger oil prices swooping in to save business plans, Beckham said.

“After four or five years of bad news relative to distress in the market, there is quite a bit of fatigue among some energy bankers,” Beckham said. “As a result, the hope that, ‘Gee, commodity prices are just around the corner, please be patient’ — no one is listening to that anymore.”

Reverberations

That shifting pressure from investors has reverberated across the industry, too, Clark said. Large producers have taken the signal to slow down their acreage purchases, which in turn means smaller producers are left holding onto assets for longer than they expected, Clark said.

Most of those smaller companies are backed by private equity, which generally looks for an investment horizon on the scale of years, not decades, Clark said.

“They were looking for quick investments; they’re not looking to build an oil company for a 25-year investment,” Clark said. “There are repercussions all the way down the food chain for the institutional investors wanting to see the major oil companies operating within free cashflow.”

The limited partners at private equity companies are starting to tell their firms to stop bringing them oil and gas deals because of the exit difficulties, Clark said.

Clark said he’s particularly interested in watching what happens when lenders carry out redeterminations on the borrowing bases they allocate to the oil companies under their auspices. Producers borrow money from commercial energy banks with their oil and gas properties as collateral. When things are going well in the industry, redeterminations of the borrowing bases will trend upward, but things aren’t going well right now, Clark said.

“This is not a great time for the industry, so it’s possible that borrowing bases will more likely go down than up on average,” Clark said. “It will put more pressure on producers.”

Houston has already seen an example of this in Alta Mesa Resources Inc.’s bankruptcy. The issue that finally brought Alta Mesa to the court was an August redetermination of its reserve-based loan that brought the borrowing base below the amount the company had already borrowed. The company would have had to make five consecutive payments to make up the $162 million deficiency.

By Joshua Mann – Senior Reporter

Courtesy of Houston Business Journal

https://www.bizjournals.com/houston/news/2020/01/27/haynes-and-boone-partner-on-energy-bankruptcy-wave.html