Oil woes are still spilling into bankruptcy courts

The number of Texas companies seeking to restructure their debt and reorganize under Chapter 11 of the U.S. Bankruptcy Code hit a record high during the first six months of 2017. So did the number of bankruptcy filings in Houston.

Bankruptcy data show that 649 businesses sought protection in Texas federal courts from creditors and lenders during the first half of 2017 — a 44 percent increase over the same period a year ago and 12 percent more than in 2009 when bankruptcies peaked during the Great Recession, according to new research conducted by Androvett Legal Media.

Federal bankruptcy courts in the Southern District of Texas, which includes Houston, saw a surge of new filings by small and midsized oil and gas service companies, pipeline owners and businesses involved in offshore drilling operations, including Azure Midstream, GenOn Energy, Vanguard Natural Resources and Allpoints Oilfield Services.

As a result, 314 companies filed for bankruptcy

during the first six months of this year in the Southern District — a jump of 58 percent from 2016, which was the previous high, according to the Androvett data.

“A lot of these companies in the oil and gas sector took on a lot of debt when commodity prices were $80 to $100, and then they struggled to stay afloat when the price dropped during the past three years,” says Jackson Walker bankruptcy partner Matt Cavenaugh in Houston.

“But now with prices mostly stabilized, these companies don’t want to be caught over-leveraged because many of their competitors went through Chapter 11 during the past two years and are now leaner and meaner without all that debt,” says Cavenaugh, whose law firm represented Houstonbased Linn Energy and Oklahoma-based Midstates Petroleum in their restructurings.

Bankruptcy data show that companies in the health care and energy sectors comprise more than half of all the Chapter 11 restructurings filed in Texas so far this year and nearly two-thirds of all business bankruptcy filed in the Southern District.

“Many of these companies thought they saw light at the end of the tunnel when it came to oil prices, but the revenues just have not been there,” says Thompson & Knight bankruptcy partner Randy Williams in Houston. “They are filing for bankruptcy now (because) they have exhausted all their other options.”

Court records show that there also has been a significant increase in bankruptcy filings by retailers and restaurant chains, including Luke’s Locker, Ben Hogan Golf Equipment Co., Joe’s Crab Shack and Texas Land and Cattle.

Legal experts say the statistics can be somewhat deceiving because scores of the businesses that filed for bankruptcy this year in Dallas and Houston are related corporate entities whose cases likely will be consolidated by the courts.

“A handful of cases spawned several other filings,” Williams says.

For example, Singaporebased offshore drilling engineering firm Emas Chiyoda Subsea filed for bankruptcy in Houston on Feb. 27. The same day, 14 of its affiliated companies also sought Chapter 11 protection.

Many oil and gas industry businesses knew they needed to file for bankruptcy in 2016 because of their crushing debt load, but they held off until oil prices climbed into the $40 to $50 range because it would give the companies more options in their efforts to restructure, says Jeremy Fielding, a bankruptcy litigator at Lynn Pinker Cox & Hurst in Dallas.

“Companies are in a much better position if they are cash-flow positive headed into bankruptcy, because then the whole issue is dealing with the crushing debt and not restructuring the entire operation,” Fielding says. “If companies are losing money and have unbearable debt going into a bankruptcy, then the companies are at the total mercy of the banks and lenders.

“I think that is a big part of what we are seeing today,” he says.