Spotlight: Oil production not significantly impacted post-bankruptcy of US E&P companies

This Spotlight from S&P Global Platts Analytics was first published July 13.

The combination of the oil price collapse and the coronavirus pandemic has decimated the industry in the first half of 2020 to a level where Exploration & Production (E&P) and Oilfield Service (OFS) companies may never fully recover. Eighteen E&P companies filed for bankruptcy protection in 2Q2020 bringing the 2020 total to 23 companies with over $30 billion in debt, according to Haynes and Boone LLC. On the OFS side, 15 companies filed for Chapter 11 in 2Q2020 bringing the total to 19 companies with another company, Hi-Crush, planning to file this month.

So what happens to the production volumes when E&P companies file for bankruptcy and come out the other side? In many cases an agreement is met with the creditors and the debt is either restructured or relieved. Sometimes the bankruptcy calls for a reorganization in management as well. Operations usually continue, without production being shut-in or being sold on a wide-scale – but not always as planned. The company's short-term and long-term growth plan is usually adjusted down and it's rare to see a company grow production in the 12 months following a bankruptcy filing.

We took a look at six companies over the past five years that have emerged from Chapter 11 and only one (Halcon in 2019) grew production post-bankruptcy. It's worth mentioning that most of the companies used in this analysis filed during the 2015-16 oil price crisis, when it was rare to see production growth due to poor prices, and the production of these companies post-bankruptcy followed the same trend.

For operators filing bankruptcy in 2020, we expect a similar outcome as prices could remain depressed for the foreseeable future. In the short term we expect D&C activity to be reduced, currently producing wells to continue producing, but with natural declines likely to outweigh new activity at least in the near term. Therefore, our short-term forecast is not likely to be significantly impacted by bankruptcies.

Drilling activity in the oil-rich basins is expected to remain relatively low in the near term, so we're expecting operators to rely on their DUC inventories to generate cash as we enter 2H2020. Looking forward, bankruptcies for E&P and OFS companies will most likely continue into 3Q2020 as oil prices remain relatively low and the coronavirus cases remain relatively high.

E&P Company Update

Recent bankruptcies

• Chesapeake Energy on June 28 became the largest US producer to date to file for Chapter 11 protection The company reached an agreement with lenders to eliminate $7 billion of its debt.
• Pure-play Delaware basin producer, Rosehill Resources, plans to file for bankruptcy by July 15 after exploring all strategic and financial options.

Exploration & Production (E&P) Companies in Default

Source: Haynes & Boon, LLP and S&P Global Ratings

OFS Company Update

Oil Field Service (OFS) companies are expected to cut an estimated 20% or 1 million global OFS employees due to the oil price downturn and coronavirus pandemic. This includes sand and proppant companies that supply resources critical to the completion process. The decrease in demand for sand and proppant due to less drilling and completion activity is hitting this part of the industry hard.

Below are three sand companies that have recently filed for Chapter 11 and one that has emerged after filing back in January of this year.

Recent bankruptcies and one emerging from it

Vista Proppants & Logistics filed for Chapter 11 bankruptcy protection on June 9.

• US sand company Covia Holdings Corp filed for Chapter 11 bankruptcy protection on June 29. The company negotiated a restructuring support agreement with most of its secured debt holders & US operations will continue as normal.
• Wisconsin sand company Hi-Crush plans to file for bankruptcy and may be forced to go out of business after losing nearly $147 million in 1Q2020. The company has closed three of its mines and reduced its workforce by 60% since mid-March due to low sand demand during the coronavirus pandemic.
• McDermott International has successfully emerged from Chapter 11 bankruptcy on June 29, after shedding $4.6 billion of debt and raising $2.9 billion in fresh credit and loans. The company had originally filed back on January 21 of this year.

Oil Field Service (OFS) Companies in Default

Source: Haynes & Boon, LLP and S&P Global Ratings