More North American drillers slide into bankruptcy
Oil companies took on billions in debt to finance their operations when prices were high. Now some face bankruptcy.
A year after Saudi Arabia and its oil cartel decided to keep their wells running and let falling prices correct a global oversupply, the number of bankruptcy cases among North American drillers has risen to 37.
That figure could double next year if crude stays cheap, as at least as many oil companies appear to be on the precipice of running out of cash or are coming up on deadlines to pay off debt, according to attorneys at Dallas-based Haynes & Boone.
The casualty count could end up growing larger than in the 2009 financial crisis, when the oil market crashed for a relatively short period and 60 U.S. and Canadian drillers went bankrupt.
“It’s harder to withstand low prices for a long time,” said Buddy Clark, head of the energy practice group at Haynes & Boone, the law firm that tallied up this year’s bankruptcies.
Sixteen of the bankrupt companies were based in Texas. Most of them were small and didn’t play a central role in the nation’s energy surge over the past few years. But together, they had $13 billion in debt.
Federal regulators have warned banks for months that oil companies could become riskier investments the longer oil prices stay low. The Office of the Comptroller of the Currency said this month that the amount of oil company bank debt that’s considered substandard, doubtful or a loss has climbed fivefold over past year to $34.2 billion. They blamed an aggressive industry run-up in debt from 2010 to 2014 as companies bought property and drilled expensive horizontal wells to capitalize on a new resource, shale oil, which previously had been inaccessible.
High levels of debt are “making many borrowers more susceptible to a protracted decline in commodity prices,” the comptroller’s office said.
Oil prices have collapsed since OPEC met in Vienna last Thanksgiving and decided to keep its crude production levels steady despite a global oil glut. Saudi Arabia and Iraq have boosted output while U.S. shale plays have lost hundreds of thousands of barrels of production since April. Swift Worldwide Resources estimates that 233,000 oil industry jobs have been swept away by the downturn. U.S. crude, which reached a 2014 peak of more than $107 a barrel, ended the past week at $40.39.
Haynes & Boone bankruptcy attorney Charles Beckham said regulators have told bankers that they need to review oil companies based on their ability to repay all their debt, not just the debt they have from the banks, because many drillers took debt from other sources, including the riskier side of the debt capital markets. From 2010 to 2015, U.S. oil companies took out about $247 billion in risky, high-yield debt to finance their shale work.
Regulators “want the banks to look at the borrowers as a whole, and if the ability to repay all of its debt is suspect” Beckham said, then banks need to assign higher risk to the funds they lend the oil companies.
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