Barring higher U.S. oil prices, about 150 more energy operators could face Chapter 11 bankruptcy filings through 2022, a new analysis by Rystad Energy indicated.
The pandemic has burdened the upstream industry, hitting debt-ridden operators particularly hard, analysts noted. West Texas Intermediate (WTI) oil has risen above $40/bbl, but exploration and production (E&P) companies and their oilfield services (OFS) brethren may have no alternative than to file for voluntary protection.
“While an improvement in oil prices toward $40/bbl WTI saved a significant number of E&Ps and prevented early Chapter 11 filings in June-July, the current price environment is in no way sufficient for a large number of E&Ps in the medium-term,” said Rystad’s Artem Abramov, head of Shale Research.
“As hedging programs set at WTI $50/bbl-plus expire in the second half of this year, we anticipate greater financial pressure on the industry unless WTI prices recover further.”
To date this year, nearly three dozen E&Ps have filed for Chapter 11, with cumulative debt of about $40 billion, according to Haynes and Boone LLP. At least 25 OFS operators also have sought voluntary bankruptcy protection.
Rystad’s E&P Chapter 11 model is based on a cash flow analysis that covers about 10,000 active North American oil and gas explorers. The model was designed as a macro-level outlook rather than individual company insights.
If WTI were to remain at around $40, Rystad’s team estimated “29 more E&P Chapter 11 filings this year, adding another $26 billion of debt at risk.”
With WTI hovering at around $40 into 2022, there could be another 68 E&P bankruptcy filings in 2021, adding $58 billion in debt. In 2022, there could be 57 more E&P filings, with debt of around $44 billion.
“That would bring the total amount of E&P debt at risk from now until the end of 2022 to $128 billion,” analysts noted.
If WTI were to remain “largely unchanged” from current levels, the total number of North American E&P filings for 2020-2022 could rise to almost 190. Between 2015 and 2019, there were almost 190 E&P filings.
The total debt for North American E&Ps between 2020 and 2022 could reach about $168 billion, “36% higher than the $122 billion recorded in 2015-2019,” analysts noted.
The number of bankruptcies year-to-date is below the total recorded in the previous downturn, particularly filings made 2016. However, total debt combined for E&Ps and the OFS sector through the first seven months of 2020 already matches full-year 2016 at $70 billion.
“Looking at the average debt per company, 2020 seems to be a clear outlier, at $1.2 billion,” analysts said. “This is 160% higher than the average debt of $460 million recorded in the 2015-2019 period and twice as much as the 2017 level, which was the second highest in terms of average debt in a year.”
The E&P and OFS bankruptcy cases share some of the same dynamics this year, according to Rystad. Average E&P debt is $1.25 billion, with average OFS debt of $1.19 billion. The OFS sector usually carries lower debt than E&Ps, because there are many small OFS suppliers/providers. The capital structure of smaller E&Ps often is controlled by families.
However, the average debt for the OFS sector is higher this year because of several large bankruptcies, analysts noted.
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