The more than two-year oil bust has led to a shakeout in the oil industry, with high-cost and inefficient drillers forced out of the market. About 100 bankruptcies have been recorded in the North American energy industry, and stronger companies are damaged but leaner than they were before the collapse started in 2014. Nevertheless, the market may only be half way there – the industry could see another 100 bankruptcies before all is said and done, according to debt restructuring specialists.
"I think we've got easily another 12 to 18 months, and we could see as many filed bankruptcies from here on out as have (already) filed in the upstream sector," Bill Rhea, a consultant with J.W. Rhea & Associates, told CNBC. In 2015, a lot of companies survived because they had hedged their output at much higher oil prices from the year before. But now, with fewer and fewer companies protected from lucrative hedging, the entire industry is more or less exposed to $50 oil and below.
Moreover, a large number of indebted oil companies have been limping along, kept alive by creditors eager to avoid getting burned by a default. Creditors piled on more debt to keep drillers operating, hoping for a rebound in oil prices. But that cannot continue forever, and at some point lenders and investors may decide to pull the plug. "If there's not a complete 100 percent agreement, the only way you can solve those problems is through the bankruptcy process," Patrick Hughes, a partner at Haynes and Boone, told CNBC. "There's going to have to be more filings just because there's no price out there that's foreseeable that's going to bail these companies out," he added.
Major lenders conduct reviews twice a year, assessing and updating the credit lines offered to drillers. That process typically takes place in March/April and September/October. In other words, we are about to enter credit redetermination season, and a few more companies could get cut off from their financing.
The latest announcement from OPEC that it would slightly trim its collective production boosted oil prices this week. Higher oil prices could save a large portion of struggling drillers, but absent a much sharper oil price rally in the months ahead, many more bankruptcies could be in the offing.
By Charles Kennedy of Oilprice.com
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