The dominos are starting to fall, and it hasn’t been a good March so far for three Texas oil and gas operators. As prices take another nosedive, here come the Chapter 11 filings as struggling producers decide the mounting pressure of debt payments and other obligations won’t wait for prices to turn. Tuesday, Quicksilver Resources Inc., a Ft. Worth, Texas shale operator, announced voluntary Chapter 11 filing in the United States Bankruptcy Court in Delaware. BZP Resources Inc. of Houston similarly filed on March 9, saying the current oil price environment made debt refinancing difficult. And as things seem to come in waves of three, Houston’s Cal Dive International, Inc. initially tripped the dominos on March 3.
This kind of thing was not unexpected, and has been heavily discussed in the media, corporate boardrooms and over many business lunches, as prices started to sink below the magical $70 per barrel number that makes lenders quiver. Most astute investors already know that much of the shale boom was financed by heavily-leveraged debt. Debt that worked all day long at $100 oil, but cannot be sustained at prices barely flirting above or below break-even.
Which begs the question, what will happen to those assets? Some smaller shale operators have been quietly paying as they go, building cash, and could easily be positioned to snatch-up distressed assets. It was bad enough that banks had to deal with taking on a flood of empty houses not so long ago. Far worse to have an oil well dumped in your lap.
But this could be a boon for the big majors, one in particular, who is in position to fare better than most. Recall the stories of people like of Joseph Kennedy, Sr., who were in a position to capitalize on the Great Depression, and came out more diversified and richer than had it not happened? Déjà vu.
Perhaps best poised to strengthen themselves amidst this draught would be the most major of the majors, ExxonMobil. Even though profits were down by almost $2 billion in the fourth quarter, they still banked $6.5 billion.
One of the likely big targets could be BP, still struggling from the 2010 Deep Horizon spill, and one major who posted a negative quarter last year. While this has been speculated for several months now, obviously neither side is commenting.
Another likely focus for ExxonMobil could be expanding its presence in shale. However, Exxon is still reeling from the 2009 sting of paying $41 billion for Ft. Worth’s XTO Energy. What seemed viable at the time, when natural gas was above $8, quickly turned sour when supplies became overly abundant and prices tanked. The XTO deal became an industry billboard for paying-up.
Perhaps now, Exxon could somewhat counter-balance that move by snagging viable shale assets at bargain basement prices.
There will likely be many unannounced deals we will never hear about, as those who stayed away from the alluring junk-debt over the last five years have cleaner balance sheets and cash on hand to quietly buy. Yes, Darwinism is alive and well in the 2015 oil patch. And some operators who got sloppy are surely poised to be eaten.
By Thomas Miller for Oilprice.ccom
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