Although oil prices have been falling dramatically since the end of November 2014, as a response to OPEC’s 166th Meeting, up until now, both lenders and E&P companies have been hopeful that a recovery in oil prices would allow them to avoid restructuring or refinancing their outstanding debt. As the WTI price has fallen below $50/bbl and seems likely to remain there for the time being, both lenders and operators are now actively seeking restructuring solutions, while oil & gas investors line up the capital to take advantage. As operators and investors continuously seek to find a “middle ground” where they can transact, many financial investors are starting to offer drilling partnerships that attempt to bridge the financing gap, instead of forcing acreage owners to sell their assets outright.
Fit for $60/bbl oil?
The following North American oil and gas operators have thus far filed for bankruptcy or bankruptcy protection since the fall of 2014: Endeavor International Corp, WBH Energy, Dune Energy, BPZ Resources, Quicksilver Resources, American Eagle Energy Corp, Duer Wagner III & Partners, Saratoga Resources, Sabine Oil & Gas, and Milagro Oil & Gas. In addition, Cal Dive International and Boomerang Tube are among the services companies that have filed for bankruptcy protection this year. Offshore rig provider Hercules Offshore Inc stated on July 23rd that they plan to file for bankruptcy protection this month. Samson Resources is among the oil and gas producers that may be close to a bankruptcy protection filing. An indicator of highly-levered companies, or those with a heavy debt burden, is the Total Debt/EBITDA or Total Debt/EBITDAX ratio, with the most vulnerable oil and gas companies with high credit risk having higher ratios, which all of the above companies have had.
As the market begins to accept the $60/bbl and under “new normal”, operators and investors alike are looking for capital solutions in order to maintain drilling plans, or simply HBP their acreage holdings. As the public markets are being hammered and are beginning to tighten on their options for E&P companies, everyone is looking for the next private source of capital. Although nearly every E&P company has been laying down rigs, reducing or even ceasing development activities, there is still a significant demand for capital. Despite needing capital to avoid defaulting on their debt, many operators also require capital to continue drilling obligations that are necessary to capture and hold lease acreage positions they acquired in the past while oil prices were around $90 / bbl-$100 / bbl.