Reeling under a load of debt and in a state of shock from the supply demand gap in what is probably the worst ever crisis to his the oil industry, U.S. shale producers, pipeline and refineries are scrambling to preserve cash and are likely to face restructuring in their struggle to stay afloat.
Due to the coronavirus pandemic, the demand for oil has fallen by 30% globally. The health crisis has heightened a price war between Saudi Arabia and Russia over market share, with Saudi Arabia flooding the global oil market with its crude.
The development piles on top of an already struggling oil industry where investors are unhappy with weak returns; it comes at a time when the United States has emerged as the world’s largest oil producer.
On Monday, with U.S. prices treading into negative territory and touched a nadir of $38 a barrel. This happened despite substantial production and spending cuts and reflects a price environment well below levels that companies and advisors had modeled in worst-case scenarios, said energy lawyers.
According to energy lawyers at Haynes and Boone, almost 50% of the top 60 independent U.S. oil producers are likely to review their options in their scramble for more liquidity.
“The reverberations from this price collapse will be felt throughout the industry and by everyone who provides services to the industry,” said Buddy Clark, an Houston-based partner at the firm.
Companies that used debt to fund acquisitions before prices crashed, including oil giant Occidental Petroleum Corp, are focusing on placating shareholders and are putting in place measures to preserve cash.
According to more than a dozen industry and financial sources, many midstream companies which are backed by private equity are staring at bankruptcy while large banks are preparing to become owners of oil and gas fields as they seize energy assets.
One such midstream company, Salt Creek Midstream, which operates in the Delaware basin in Texas, has already hired Jefferies Financial Group as well as law firm Kirkland & Ellis for debt advice, said three sources aware of the matter at hand. Sources preferred the cover of anonymity given that the information is not in public domain.
Salt Creek and its advisers declined comment.
Private equity investors Ares Management Corp as well as ARM Energy decline comment.
In the coming weeks, more shale producers are expected to seek bankruptcy protection, said industry and banking sources.
Earlier this month, Whiting Petroleum declared that it is seeking bankruptcy protection. Many small and mid-sized producers, including Chesapeake Energy Corp have retained debt advisers.
According to Fitch Ratings, the forecast for loan default rate for 2020 among energy companies is 18%. Almost 20% of all energy corporate bonds are trading below 70 cents on the dollar, indicating distress, according to data from MarketAxess.
As for Occidental, it is hoping selling assets would reduce its debt pile, which stood at nearly $39 billion at the end of 2019 following a M&A deal with Anadarko Petroleum last year. Since then, it has twice cut costs twice and slashed its prized dividend.
According to a survey of energy producers done in April by the Federal Reserve Bank of Kansas City, around 40% are likely to face insolvency within a year if oil prices remained around $30 a barrel.
On Wednesday, U.S. crude prices closed under $14 a barrel.
“The restructuring guys are extremely busy. I don’t think they’ll be busy for just this year – I think it’s a multi-year process,” said James West at investment bank Evercore ISI to investors on Wednesday.