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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Bankruptcy Fears Turn Into Merger Mania In U.S. Oil Patch

  • Last year, bankruptcies in the U.S. shale patch hit record levels.
  • Now, dozens of companies have been successfully emerging from Chapter 11 bankruptcy protection, with M&A their preferred modus operandi.
  • Triple-digit oil prices have helped many companies return leaner and more profitable than ever, and shareholders are loving it. 

How quickly fortunes can change in the oil and gas business. Last year, U.S. oil and gas companies were still filing for bankruptcy at record levels right in the midst of an oil price recovery. Smaller producers were the main victims; eight North American oil and gas producers with an aggregate debt of $1.8B filed for bankruptcy protection in Q1 2021. But it’s now official: the tidal wave triggered by the price correction that began in late 2014 is finally over.

According to the final report by energy and restructuring law firm Haynes and Boone, since the beginning of 2015, a total of 274 oil and gas producers as well as 330 oilfield services and midstream companies have filed for bankruptcy involving over $321 billion in secured and unsecured debt.

The U.S. Oil Patch entered rough seas facing stiff headwinds after OPEC declared its intention to take back market share from the prolific U.S. shale sector over Thanksgiving weekend in 2014. Oil prices began dropping precipitously in 2015, and it was only a matter of time before a wave of bankruptcies descended on a sector famed for epic boom and bust cycles. Aggregate debt in the oil and gas sector peaked in 2016, with the latest bust cycle of 2019/2020 failing to attain those heights thanks to a wave of Covid-19 vaccines that helped the world emerge from lockdowns and travel restrictions faster than anticipated.

There was “only” $2.1 billion in total debt reported in 2021, marking the lowest amount since 2015--evidence that the tide has finally turned. The previous low was $8.5 billion reported in 2017. Only 20 oil and gas producers filed in 2021, about half of the more than 39 cases filed each year.

Related: Rationing Looms As Diesel Crisis Goes Global

Even more encouraging, dozens of companies have been successfully emerging from Chapter 11 bankruptcy protection, with M&A their preferred modus operandi.

Here we look at several oil and gas companies that have successfully emerged from bankruptcy in recent times.

#1. Weatherford International

       Market Cap: $2.2B

       YTD Returns: 11.7%

Texas-based Weatherford International plc (NASDAQ:WFRD) provides equipment and services for the drilling, evaluation, completion, production, and intervention of oil, geothermal, and natural gas wells worldwide.

Weatherford is currently enjoying a second run as a public company after it emerged from bankruptcy and relisted in June 2020. Previously, Weatherford trailed only Schlumberger (NYSE:SLB), Baker Hughes (NASDAQ:BKR), and Halliburton (NYSE:HAL) among the largest oilfield services providers before crude prices collapsed in 2015. Weatherford struggled to repay its debts, which totaled about $8.3 billion, before eventually succumbing and filing for bankruptcy protection in 2019.

Then the coronavirus pandemic struck last year, just months after Weatherford emerged from Chapter 11, decimating demand for oil and gas. Weatherford was forced to shed jobs, cut costs, and pare down assets as energy producers slashed capital spending, the lifeblood of oilfield services companies.

But with fuel demand and oil-industry activity picking up again, Weatherford is now looking to expand its market share in advanced energy technologies in the midst of steadier results.

In looking to recapture market share, Weatherford is emphasizing its offerings in digital technologies, such as its oil-production optimization platform, called ForeSite, which Chief Executive Officer Girish Saligram says has been deployed at 400,000 wells worldwide.

“We do recognize that we have lost a little bit of ground over the past few years,” “We have a much lower share position today, but rather than get overwhelmed by that, we look at that as a terrific opportunity because we think it’s easier when you’re a small player to get a higher share,” Saligram has said.

WRFD shares have been lagging this year, up a mere 11.7% YTD but having gained 152.7% over the past 12 months, mainly on worries that the shares could be running ahead of fundamentals.

#2. Civitas Resources

       Market Cap: $5.2B

       YTD Returns: 19.7%

Civitas Resources, Inc. (NYSE:CIVI) is an E&P company that focuses on the acquisition, development, and production of oil and natural gas in the Rocky Mountain region in Colorado. The Denver-based company was created from a three-way 4.5B merger in 2021. Shareholders in Bonanza Creek Energy Inc. (NYSE: BCEI) and Extraction Oil & Gas (Nasdaq: XOG) voted overwhelmingly in favor of the tie-up, adding to the previous board approval of privately-held Crestone Peak Resources

And Civitas shareholders couldn’t be happier.

Profits for Civitas Resources have jumped after merging, thanks to rising crude and natural gas prices in 2021, setting it up to make more money this year without increasing production. 

Related: Unsold Oil Forces Russian Operator To Cap Pipeline Flows

Civitas reported $178.9 million in 2021 profit, or $4.82 per share, on $930.6 million in revenue from oil and gas sales of production that was averaging 153,900 barrels a day at year’s end. Despite prices driven up this year by Russia’s war in Ukraine and global uncertainty about oil and gas supplies, Civitas Resources plans to hold its 2022 production relatively flat at about 156,000 to 167,000 barrels of oil and natural gas equivalents per day.

#3. Gulfport Energy Corp

       Market Cap: $1.9B

       YTD Returns: 15.7%

Oklahoma-based Gulfport Energy Corp. (NYSE:GPOR) engages in the exploration, development, acquisition, production of natural gas, crude oil, and natural gas liquids (NGL) in the United States, primarily in the Utica Shale.

Gulfport Energy filed for Chapter 11 bankruptcy on Nov. 13, 2020. It announced its emergence from restructuring on May 18, 2021. Bloomberg has reported that Gulfport has discussed merging with closely held oil and gas explorer Ascent Resources, with the value of the combined company estimated at ~$8B, or more than 4x Gulfport’s current market cap, according to the report. Ascent is also active in the gas-rich Utica Shale of Ohio.

Gulfport Energy recently reported in-line Q4 results while guiding FY 2022 production lower.

#4. Chesapeake Energy

       Market Cap: $11.4B

       YTD Returns: 32.2%

Widely regarded as a fracking pioneer and the king of unconventional drilling, Chesapeake Energy Corp. (NASDAQ:CHK) found itself in dire straits after taking on too much debt and expanding too aggressively. For years, Chesapeake borrowed heavily to finance an aggressive expansion of its shale projects. The company only managed to survive through rounds of asset sales (which management is averse to), debt restructuring, and M&A but could not prevent the inevitable--Chesapeake filed for Chapter 11  in January 2020, becoming the largest U.S. oil and gas producer to seek bankruptcy protection in recent years.

Thankfully, Chesapeake successfully emerged from bankruptcy in 2021, with the ongoing commodity rally offering the company a major lifeline.

The new Chesapeake Energy has a strong balance sheet with low leverage and a much more disciplined CAPEX strategy. The company plans to focus the majority of its capital spending on gas fields in the U.S. Northeast and Louisiana and will let its oil output decline, Chief Executive Doug Lawler has revealed.

The company is targeting <1x long-term leverage in a bid to preserve balance sheet strength, target production is 400+ thousand barrels/day, and it intends to limit CAPEX to $700-750 million of annual capital expenditures and positive FCF. CHK says it expects to generate >$2 billion of FCF over the next five years, enough to improve its financial position significantly. 

#5. Seadrill

About a month ago, offshore drilling contractor Seadrill Limited (OTCPK:SDRLF) emerged from Chapter 11 bankruptcy, a little over a year after filing for it. This was Seadrill’s second bankruptcy filing in about four years.

The restructuring significantly de-levered the company’s balance sheet by equitizing approximately $4.9 billion of secured bank debt previously held across twelve silos, resulting in a streamlined capital structure with a single collateral silo. The company also raised $350 million in new financing pursuant to the plan. 

Holders of existing shares in the company’s predecessor, Seadrill Limited, were reduced to 0.25 percent of their existing holdings, while the company’s employee, customer, and ordinary trade claims were unaffected by the restructuring.

A few days ago, Seadrill announced it had appointed Simon Johnson as President and Chief Executive Officer to replace outgoing CEO and President Stuart Jackson, effective immediately.

Simon has significant experience in the offshore drilling industry and has served as Chief Executive Officer of Borr Drilling and in various roles with Noble Corporation, including most recently as Senior Vice President.

It’s too early to tell whether Seadrill’s second comeback will become a hit or yet another miss, but current industry tailwinds are encouraging.

Like other sectors of the oil and gas ecosystem, overcapacity has been a major problem for offshore drillers like Seadrill, depressing prices and eroding negotiating leverage with customers. Thankfully, similar to their onshore brethren, the oil price crash has taught offshore producers some important lessons in production discipline, forcing them to trim inventories to reflect market conditions.

To the extent workboat operators have trimmed their available marketed fleets, the trends in the drilling rig market suggest stronger vessel pricing is in the offing, too. Indeed, the Dallas Fed survey showed that service companies, on average, expect the price of their primary service or product to increase 8.5% this year in response to rising demand. Controlling input costs will be critical for improved profitability, but remains well within the ability of drilling managers.

By Alex Kimani for Oilprice.com

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