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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Slow Rebound In Oil May Trigger Another Bankruptcy Wave

oil rig helicopter

Many investors have started to jump back into the oil sector in recent weeks based in large part on the slow upward grind in oil prices. With WTI and Brent both above $45 in recent trading, investors are starting to become optimistic and think perhaps the worst is over. That view is too short sighted.

Some investors seem to have forgotten 2015 already. Last year was a terrible year for energy investors, but many investors and even corporate officers may be deluding themselves in believing that if they simply hold on, the good times will return. The reality is that for many oil companies, the future is already written. In the last major oil bust of the 1980’s, a little more than a quarter of oil companies went out of business. The same thing is going to happen again this time. And that means that investors and executives at oil companies showing the most signs of stress need to begin being realistic with themselves – some companies are already too far gone to save even if oil prices have finally bottomed.

None of this means that there aren’t major opportunities in the oil patch, there are. Investors simply need to be very careful and selective to capture these opportunities.

In 2015, 42 oil companies filed for bankruptcy. This year will likely be even worse. In December of 2015, 11 percent of E&P companies defaulted on debts coming due versus just 0.5 percent earlier that year. Again, 2016 will be much worse. The problem is that even…

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