According to the U.S. Energy Information Administration (EIA), the United States (U.S.) regular gasoline retail price as of the Monday before Labor Day fell to $2.22 per gallon this year, the lowest level for this time of year since 2004. The EIA concludes that U.S. gasoline prices are relatively low because of continued low demand for gasoline since mid-March, when travel demand fell because of efforts to limit the spread of coronavirus. Indeed, monthly motor gasoline consumption in the U.S., measured as product supplied, reached a low of 5.85 million barrels per day during April 2020, the lowest level since 1974.
There is little question that U.S. oil and gas production is expected to experience a decline in response to the first quarter’s supply-and-demand shocks. In addition to reduced production of newly drilled wells corresponding to a reduction in drilling activity, oil and gas production naturally experiences declines in connection with the monetization of existing wells. Specifically, shale wells typically decline 70 to 90 percent relative to their peak production within a three-year period, with the large majority of that production decrease taking place within the first 12 months. Consequently, the absence of current drilling activity can rapidly result in the decrease of U.S. oil production. According to estimates developed by energy news website oilprice.com, the absence of drilling in U.S. shale basins would theoretically cause a decline in production by more than one third to less than 5.0 million barrels per day by the end of 2020.
There is also little surprise that there were almost 50 bankruptcies during the first half of 2020 among (a) 25 exploration and production (E&P) companies, (b) 19 oil field services (OFS) companies, and (c) 3 midstream companies. The numbers are continuing to increase during the second half of 2020, placing (as of August, 2020) a total of $70 billion of debt at risk among E&P and OFS companies. If West Texas Intermediary (WTI) continues to hover around $40/barrel, we could (a) witness another 29 more filings among E&P companies this year, adding another $26 billion of debt at risk, and (b) 150 or so filings during the next 2 years, representing another $128 billion in debt among E&P companies.
According to BDO’s 12-Month Energy Investment Outlook, the pandemic has exacerbated these pressures, leading to even lower oil prices, sharp drops in demand, and a widespread economic downturn. Given the COVID-19 resurgences in certain states, and notwithstanding governmental assistance, the demand for oil will continue to be depressed, thereby leading to more bankruptcies on the horizon.
Because the oil and gas industry is a capital-intensive industry, there are often issues with financing arrangements made with industry participants. In a distress scenario, these issues commonly relate to negotiating with lenders to cure defaults, developing strategies to maximize the value of assets, preserving the rights of secured parties, navigating through disputes amongst different tranches of debt or within a lender group, obtaining new take-out financing and, possibly, operating without no new financing. Addressing these and other financing issues are critical to the viability of an oil and gas company.
To continue reading the full article, please click on the following link: Managing Financial Distress in the Oil Patch (Paper originally presented in October 2020).