More oil and gas bankruptcies coming

Bankruptcies in the U.S. oil patch are on the rise after the global pandemic decimated demand. But shale companies were struggling before COVID hit, loading up on debt before prices came crashing down.

Law firm Haynes and Boone counted nearly 500 bankruptcies among oil and gas companies since 2015, with 60 so far this year, and 18 in July alone.

Buddy Clark, co-chairman for the firm’s energy practice, expects those bankruptcies to accelerate. His Dallas-based firm represents oil and gas clients in bankruptcy court, primarily creditors such as commercial banks and private equity firms.

Oil prices, which were soaring above $140 a barrel when hydraulic fracturing techniques were perfected, are now hovering around $42 a barrel.

How did we get into this situation with oil and gas companies increasingly going bankrupt?

This new industry required, instead of 10 acres or 40 acre-tracts to drill oil, it required 1,000 acres, 2,000 acres, to properly exploit the shale.

That required an incredible amount of capital. To play the game you had to acquire the leases and spend a lot of money drilling wells before you even saw a dime coming out of the ground.

But all those dominoes fell when the commodity price no longer kept propping up that business plan. The oil industry has been through a lot of ups and downs. What makes this downturn different?

You can go back to the early 1900′s, when every time a new boom town was founded, the supply just overwhelmed the market so prices collapsed.

What’s different now is the demand destruction. It’s going to take a long time to recover, and the question is does it ever recover, or do we see alternative sources of fuel taking up the slack?

Are you expecting bankruptcies to continue to accelerate in the oil and gas sector?

We’re going to continue to see more pain in the industry. If you would tell me we could find a cure for COVID tomorrow, I could give you a much better, clearer idea of what’s going to happen. There is no clear future, so it makes it harder for people to invest in new properties, new companies, new employees.

What types of companies are struggling the most?

The new market entrants – they were late to the game but took on debt and then prices collapsed before they could establish any value.

You’re also seeing the companies that bought on the fringes of the best plays. The other group you could look at are those with debt maturities coming up and there’s billions of dollars coming due in the next two to three years.

But it’s not just these new market entrants that are hurting. There are some very substantial companies that have also filed.