Oil patch bankruptcies slow in 4Q but surge for full 2019

The number of oil patch bankruptcies in the fourth quarter of 2019 slowed slightly from the third quarter but also featured the largest bankruptcy filing in the North American energy sector in at least five years.

The data from the quarterly report from the law firm of Haynes & Boone reported nine bankruptcy filings in the fourth quarter in the North American exploration and production (E&P) sector. That’s down from the 15 recorded in the third quarter of the year and 13 recorded in the second quarter of 2019.

The bankruptcy by EP Energy carried with it secured liabilities of $4.33 billion. In the five years of bankruptcy filings recorded by Haynes & Boone in the report, that is the largest amount of secured liabilities going back to the start of 2015. The total liabilities, secured and unsecured, were approximately $7.33 billion. That’s the second-largest total liability filing behind that of Sandridge Energy in mid-2018, which clocked in at $8.2 billion.

Although the number of filings may have slowed in the last quarter, the total for the year was 42. That’s up significantly from the 24 in 2017 and the 28 in 2018. Although the price of oil actually rose over the course of the year and traded in a generally narrow range, what has hit a lot of E&P companies is the price of natural gas. On the natural gas contract of the CME, it opened the year at $3.59/Mcf. It’s now about $1.90-$1.92.

Although the number of bankruptcies is down, that should not be taken as a sign of improvement. S&P Global last month put out a report on the state of high yield debt, aka junk bonds, which are a major financing tool for the E&P industry.    

It said in the report that the U.S. “distress ratio,” which it defines as debt instruments that have a more than 1,000 basis point spread over U.S. treasuries, had risen overall to 8.9% in November from 8.5% in October. Companies that are distressed have a CCC rating from the ratings agency. In November, 36.4% of the debt instruments considered distressed were in the oil and gas sector. That rose from 34.8% just one month earlier. 

The enormous bankruptcy in the fourth quarter was for EP Energy. It had a $4.9 billion secured debt pile. Its key lenders, Apollo Global Management and Elliott Management, would wind up with equity in a company with a much smaller debt load but where they take a hit on the debt they owned. EP was filed as a prepackaged bankruptcy with all key parties in agreement.

Since the beginning of the year, the price of West Texas Intermediate has plummeted from more than $62/barrel to about $53/b midday Monday. But it is believed that a significant number of companies took advantage of the December run-up to more than $60 for WTI and more than $66 for Brent to hedge some of their output. That might stem what would otherwise be a bloodbath of more bankruptcies if the price of oil stayed down or fell from here.