by ROCKMAN » Tue 11 Jul 2017, 17:47:20
There has been a great deal of erroneous spin tossed out about the huge number of oil patch companies filing bankruptcy. More specifically filing Chapter 11 bankruptcy. In those situations, which include the vast majority of energy industry filings, it does not mean those companies are "going out of business". But nor does it mean they are in good financial condition either. What it actually does mean is that companies, by filing Chapter 11 bankruptcy, are significantly improving their financial situation and gaining a potential to reinvigorate their activities. That will be a very difficult FACT for some here to accept.
Those running around like their hair was on fire declaring these bankruptcy filings were a death knell of the industry had it 100% ass backwards. Chapter 11 allows them to recover from the huge debt loads they took on particularly during the shale boom. It should also be noted that the majority of energy industry filings were made by service companies and not E&P companies. Also note the largest Chapter 11 filing in 2016 was an energy company but not in the fossil fuel industry. It was in the solar industry: "SunEdison's bankruptcy had been widely telegraphed, and it occurred for different reasons. A ravenous expansion run had left the company with $11.7 billion in debt through September. SunEdison no longer had the cash to pay for its debt."
Here's an oil patch update from last October:
"Fewer and fewer oil exploration and production companies are declaring bankruptcy. But more oilfield service companies are. So far this month, only one North American E&P firm filed for Chapter 11 protection, according to data released on Tuesday by the Dallas law firm Haynes & Boone. That’s down from two in September, three in August and four in July.
But it’s been an especially tough few months for service companies. As crude prices began crashing in 2014, drillers started idling rigs. That led to fewer jobs for the companies that make their money helping producers pump oil and gas. Moreover, when producers did hire service companies, they often forced them to heavily discount their rates. Eight service companies filed this month. Seven filed last month, and eight again the month before. Almost 50 have filed in the last six months, half of the 108 over two years.
In total, 213 North American oil and gas companies have now filed for bankruptcy since the start of 2015, listing more than $85 billion in debt. The most recent exploration firm: the private oil and gas company Mountain Divide, based in Montana, filed on Oct. 14, and listed $83 million in debt. On the oilfield services side, Houston-based Key Energy Services filed on Monday, with more than $1 billion in debt."
But back to understanding the POWER companies can utilize thanks the US govt bankruptcy laws. Here's a specific example of the BENEFIT a company has thanks the a Chapter 11 filing:
"A company in another state recently stated its intention to file for bankruptcy. The gas and oil company will file for Chapter 11 bankruptcy. Reportedly, it has been struggling in light of the current low energy prices. In Massachusetts and elsewhere, bankruptcy protection may be a viable solution for a company facing financial difficulties.
The company believes that filing for Chapter 11 bankruptcy will enhance its competitive position. During the past year, it has reportedly being striving to decrease its cost structure as well as enhance operating efficiencies. Reportedly, the bankruptcy filing will allow for the elimination of over $850 million in unsecured prepayment premiums, principal and accrued interest on its balance sheet. In addition, equity totaling $200 million is expected to be injected into the company to fund its development plan.
Through its bankruptcy filing, the company will also restructure its agreement regarding the purchase and sale of crude oil with another company on terms that are more favorable to the company. The company is additionally negotiating with a bank concerning the company's revolving credit facility, or variable line of credit. Finally, all working interest, royalty, customer and employee obligations will be paid in full."
Again this isn't arguing that the collapse in oil prices combined with excessive borrowing during the boom didn't do significant financial damage to the energy industry. But that huge number of bankruptcy filings, despite the claims of some armchair warriors here, doesn't represent the "death" of the industry but actually represents a rebirth. How well companies make use of this "second wind" thanks to the federal bankruptcy laws remains to be seen.
These FACTS will be difficult for some to absorb so I'll give the some time before I add some more details.