Whiting the first big US producer to file for bankruptcy due to recent price collapse

Bakken oil and gas producer Whiting Petroleum filed for bankruptcy, the company said Wednesday, the first big shale producer to file for Chapter 11 protection due to the recent price collapse.

The reorganization plan is intended to deleverage Whiting's capital structure by over $2.2 billion, according to a Wednesday news release.

Whiting "will continue to operate its business in the normal course without material disruption to its vendors, partners or employees," the company said in its release. "Whiting currently expects to have sufficient liquidity to meet its financial obligations during the restructuring without the need for additional financing."

Global oil prices have tumbled since late January, as the spread of the coronavirus has drastically reduced demand, while a war for market share launched by Saudi Arabia and Russia has put even more crude on the market.

While benchmark futures prices have fallen into the low $20s/b, spot US shale crude prices have fallen even lower, as refiners have cut runs, while storage has begun to fill.

Bakken crude priced at Guernsey, Wyoming was assessed by S&P Global Platts at just $13.27/b Tuesday, for instance, a $12.50/b discount to WTI at Cushing, Oklahoma.

Dozens of upstream companies have already slashed capital spending guidance for 2020 because of low oil prices, including Whiting.

2020 CAPEX NEARLY HALF OF LAST YEAR

Whiting on March 16 said it will reduce its capital spending by more than 30% down to a range of $400 million to $435 million. By comparison, Whiting spent $778 million in 2019 and had planned on about $600 million in 2020. Now, it's down to nearly half its total from last year.

One often-mentioned consequence of the upstream reductions is a likely wave of industry bankruptcies ahead, according to analysts.

North American E&P operators filed a total of 42 bankruptcies last year, according to Haynes and Boone's Oil Patch Bankruptcy Monitor – more than in 2018, as many operators still grappled with the fallout from a 50% oil price drop in late 2014 and never got ahead of their debt obligations.

Jeff Nichols, co-head of Haynes and Boone's energy group, thinks bankruptcies will be even higher this year.

"It will be substantially higher without a doubt [and] I think we'll start seeing them soon," Nichols said last week. "Companies are already seeing a liquidity crunch as oil continues to drop."

Even larger operators which for all purposes were in good shape, with trimmed-down capital budgets, substantial cash flows, paid-down debts and hedges well above current oil prices, will feel the crunch when the hedges roll off, Nichols said.

Heavily invested in the Bakken Shale, the oil price collapse has hit Whiting particularly hard. A number of analysts see Whiting's decision to enter bankruptcy as more of a triage move than a major fix.

In a harsh assessment of the company's situation, SunTrust Robinson Humphrey said a move into Chapter 11 bankruptcy will not solve all of its problems.

BANKRUPTCY A TEMPORARY SOLUTION

"We believe this was more of a temporary solution than long-term sustainable plan," SunTrust said. "We believe this financial demise was due to a combination of difficult macro conditions combined with sub-par operations for several quarters. We remain skeptical whether Bakken pricing and company acumen will be sufficient to grow an even leaner company post emergence."

Research group Bernstein said its analysis of debt notes maturing over the next 12 months showed it is unlikely 2020 maturities would bankrupt a "significant" part of the upstream sector and erode supply at $30/b.

But in a Wednesday note, Bernstein said it had singled out the company, citing its research on Whiting issued in mid-March as a case where a company's 2020 maturity exceeds its estimated EBITDAX after interest expense.

"Essentially, our view is that companies will have to make some decisions around refinancing or repurposing free cash flow, dividends, or capex," Bernstein said.

Internal discipline and not market access is the answer to the US supply problem, it said.

"[That] will be the path forward by which the sector rebalances the market," Bernstein said, especially if the Trump administration provides access to credit.

According to Fitch Ratings, the year-end energy default rate is expected to close in on the record 19.7% mark set in January 2017.

"Our original 7% projection for 2020 called for roughly $11 billion of defaults but that amount looks set to triple, leading to a 17% default rate. The 2021 sector default rate outlook appears equally bleak absent a material market price bump and improved market access," Eric Rosenthal, Fitch senior director, said Wednesday.