The oil price crash has been creating a wave of energy-related bankruptcy filings in the past two years, prompting many U.S. energy companies that were previously sitting comfortably with high oil and commodity prices prior to 2014 to now seek ways to restructure their businesses and debts.
But no matter: most of these troubled companies continue to produce oil, natural gas and coal, and despite their desperate financial situation, they’re not out of business. They’re not quite dead, nor are they alive—they are the zombies of the energy industry, some of which have successfully emerged from their Chapter 11 protection (and some which are still just holding on).
Contrary to initial expectations that low commodity prices would naturally push a large number of less cost-efficient players out of business, these companies aren’t going anywhere. Many of them are using Chapter 11 bankruptcy protection filings to restructure debts and slash costs, while keeping production levels almost unchanged. This, quite naturally, does not help excess supplies to draw down—an otherwise necessary correction and natural conclusion to the low price of oil.
This forestalling of natural events and artificial propping up of the zombies has stunted the recent oil price rally. (Here goes an honorable mention to the OPEC-related rhetoric in recent weeks, which seems to be able to swing crude oil prices up and down in much the same way as the U.S. inventory reports usually tip the market).
In addition, basking in the US$100 oil price glory had prevented oil companies from looking too hard for more cost-efficient ways of doing business. These companies have now had to adapt quickly to the new ‘lower-for-longer’ world with cost and expenditure curbs and restructuring, which have helped their mines and oil wells stay profitable and worth digging (and drilling) at.
According to Wood Mackenzie’s research analyst Roy Martin, the underlying theory that more bankruptcies mean significantly lower production was wrong from the very beginning, The Wall Street Journal’s Timothy Puko and John W. Miller write.
“And people are starting to come around to that now,” the WSJ quotes Martin as saying.
According to Haynes and Boone’s Oil Patch Bankruptcy Monitor dated October 19, as many as 105 North American oil and gas companies have filed for various bankruptcy protections and proceedings since January 2015. The bankruptcies include Chapter 7, Chapter 11, Chapter 15, and Canadian cases. This year alone, a total of 61 producers have filed for bankruptcy. Texas leads the rankings that no state ever aspires to top, with 46 E&P bankruptcies filed over the past two years, the report shows.
Moody’s Investor Service has also recently warned that there are more oil and gas bankruptcies looming.
Still, as early as in May of this year, Wood Mackenzie said in its report ‘Surviving the cycle: E&P financial health and the impact of bankruptcies’ that although it expects more upstream businesses to file for bankruptcy, resorting to protection would not be widespread, and US production would not be materially affected.
Coal production and stockpiles have not plunged either after three of America’s five biggest coal miners - Peabody Energy, Arch Coal, and Alpha Natural Resources - have filed for bankruptcy in the past year and a half.
According to IHS Global Energy data compiled by the WSJ, the three companies’ combined output accounted for around 33 percent of U.S. coal supply in the first half of this year, compared to 36 percent in the first half of 2015 and 34 percent in 2014.
And note this: two of those three, Arch Coal and Alpha Natural Resources, emerged successfully from Chapter 11 after the first half of this year ended, Alpha Natural Resources in July, and Arch Coal earlier this month.
Regarding total U.S. coal stocks, there is no shortage of supply, data by the Energy Information Administration (EIA) out on Tuesday showed.
Even with the normal seasonal drawdown that is typical of August, coal stockpiles levels were still 3.8 percent above the level observed last year, when coal stockpiles stood at 157 million tons.
All of the above were facts to test the idea if there is a direct and immediate-term correlation between the chain of events: low prices, high bankruptcy rate, lower production.
Now it’s up to the companies that are currently emerging from bankruptcy protection to show that they have learned their lesson. If not, and if energy players continue to operate on borrowed time, the market may never be able to correct itself, and under $50 may be here to stay.
How long can the zombies hold out? The U.S. hopes that it is longer than Saudi Arabia.
By Tsvetana Paraskova for Oilprice.com
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