Struggling oil companies are taking advantage of US coronavirus aid
American oil and gas companies were often in financial trouble well before the coronavirus economic crisis, and now many are asking for taxpayer assistance to cushion their fall.
Texas-based Battalion Oil, which recently changed its name from Halcón, has taken a $2.2m coronavirus relief loan, after going bankrupt twice within the last four years and facing accusations of excessive spending on an executive pay, private planes and luxury vehicles.
Despite a history of financial woes, Battalion is receiving assistance under the paycheck protection program (PPP), the US government’s strategy for getting cash to small businesses so they can continue to pay workers during the coronavirus shutdown as part of a more than $2tn aid package. The company will not have to return the money if it spends it on approvable expenses, including payroll, rent and utilities.
Many independent drillers were already mired in debt from chasing the fracking boom, according to analysts. They were finding it harder to secure investment and even facing bankruptcy.
Other companies that analysts have flagged as having risky levels of debt have received loans too, including the Oklahoma-based Laredo Petroleum, which took a $1.2m payment. Laredo’s former CEO also lobbied the Trump administration to scrutinize what he saw as uncertainty in climate science. PDC Energy took a $10m payment but repaid it, citing new guidelines from the government.
Oil and gas companies – even large ones – are not breaking any rules by taking the loans. But government oversight and environmental advocates, as well as Democratic lawmakers, are warning the payments are bad investments that will only prolong the lives of already-troubled companies, contribute to the climate crisis and eat into government assistance meant for mom-and-pop businesses and individuals.
A recent review by the Guardian and the investigative research group Documented, found that at least $50m in taxpayer-backed coronavirus loans meant for small businesses have gone to the fossil fuel industry. That figure has since grown to at least $113m.
Donald Trump in early April met with oil and gas industry representatives seeking government help during the crisis and since then, the aid has flowed. In addition to doling out PPP loans to fossil fuel companies, the government has expanded the Federal Reserve’s Main Street lending program in a way that could potentially help indebted independent oil and gas companies, including Occidental Petroleum Corporation, one of the companies that met with Trump.
The Fed also plans to offer bond buybacks that could benefit at least 90 fossil fuel companies, including giants such as ExxonMobil, Chevron and Koch Industries – which are feeling the huge decrease in oil demand but are not expected to be hit as hard as smaller companies.
One top Democrat – the House majority leader, Steny Hoyer – has endorsed purchasing oil to restock the Strategic Petroleum Reserve, which other leaders in the party have resisted.
The Democratic senators Brian Schatz and Sheldon Whitehouse in a letter to the Fed this week said the pandemic “was not the source of the oil and gas industry’s dire financial condition”, and that accommodating it “poses both a credit risk and a more profound climate transition risk to taxpayers”.
Lawmakers in the House have proposed prohibiting the oil and gas industry from taking coronavirus funds to make sure “they are not used to pay off bad debt taken on by fossil fuel corporations before the public health crisis”.
Government assistance to fossil fuel companies during the pandemic comes as scientists warn the world must stop extracting and burning coal, oil and gas to avoid the worst of the already-severe climate crisis.
Debt problems
An activist investor last year accused Battalion of “excessive” spending, including on executive pay and a private plane used by its former CEO, Floyd Wilson.
A company controlled by Wilson sold the plane – a Raytheon Hawker 800A – to Battalion for $2.4m, according to a regulatory filing. His contract also guaranteed his membership of a Houston country club and the use of a “late model luxury automobile valued at up to $100,000”.
Wilson’s total compensation rose to $24m the year the company first filed for bankruptcy in 2016. He also received a $5m severance package when he stepped down in 2019.
Battalion confirmed receiving the government coronavirus aid when queried by the Guardian during an earnings call on Tuesday, after declining to disclose the loan’s value in recent regulatory filings.
“We think that was the right thing to do,” a company official said. “We felt like those PPP loans were set up for businesses of our size and I think it helped us to [further] our operations.”
Battalion has 69 employees, and its market capitalization, or total value of its shares, is $74m, according to Bloomberg.
Battalion saw the 12th biggest bankruptcy in its sector since 2015, according to Documented.
The company isn’t alone in its debt problems in the sector. Seven North American exploration and production firms have declared bankruptcy just in 2020, according to the law firm Haynes and Boone.
US drillers expanded immensely when they discovered hydraulic fracturing, a new technique for extracting oil and gas. Independent producers borrowed money to fund their exploits.
But capital has begun to dry up as investors see the companies can’t make as much money as they hoped.
Leslie Hayward, the director of business and content development at the analysis firm Rapidan Energy Group, said the outlook for US shale companies was bad before the pandemic and the recent steep decline in oil demand that forced oil prices negative.
“The sector has been experiencing some strain for quite some time, and going into 2020 it was clear that there was going to be consolidation, a drop in production, and likely some bankruptcies. The pandemic poured gasoline on that fire,” Hayward said.
Andrew Grant, the head of oil, gas and mining at Carbon Tracker – a thinktank that analyzes the impact of climate change on markets – said investors have begun to turn away from shale companies.
“You have to wonder if trying to bail out the industry indefinitely would amount to just trying to defy gravity essentially,” he said.
The sector has been experiencing some strain for quite some time … The pandemic poured gasoline on that fire
Leslie Hayward