Rising oil prices tamped down E&P bankruptcies in Q1'21

Crude oil prices that have risen from less than $25/barrel to more than $60/bbl have reduced the size of bankruptcy cases being filed by oil and gas producers, according to lawyers who monitor Chapter 11 filings in the oil patch.

Smaller oil and gas producers dominated North American bankruptcy filings in the first quarter of 2021, according to Texas law firm Haynes and Boone LLP's Oil Patch Bankruptcy Monitor. These smaller producers accounted for all eight of the first quarter's Chapter 11 filings, with roughly $1.8 billion in debt laid before the court for reorganization.

The $1.8 billion total is the lowest in two years, while eight filings in the first quarter is the most in a quarter since the first quarter of 2016, according to the law firm's April 15 report. Of note was the absence of any $1 billion filings, ending a two-and-a-half-year stretch of billion-dollar-plus reorganizations dating back to the third quarter of 2018, Haynes and Boone said.

However, pure-play shale gas producers in Appalachia and Louisiana's Haynesville Shale should not breathe easy, Haynes and Boone partner Buddy Clark said.

"The price of oil going up to $60 has been very helpful, but natural gas hasn't gone up, so Appalachian and Haynesville producers are not going to see a lot of price relief," Clark said. Despite investor enthusiasm for shale driller stocks, the balance sheets are still full of debt, and gas prices have not been able to get consistently above $3/MMBtu.

For smaller exploration and production companies, or E&Ps, access to credit to refinance existing debt is getting more difficult, Haynes and Boone partner Charles Beckham said. "There are still challenges for a lot of folks," Beckham said. "Prices went up, but not enough to make it safe [for lenders]."

"The larger [$1 billion-plus] debt has worked itself through the system, but there are still troubled players out there," Beckham said.

According to Clark, banks are not only uninterested in lending E&Ps more money, they are getting out of energy finance entirely. The U.S. is down to 18 banks with energy departments, and "very few are looking to increase their energy loans," Clark said.

Clark and Beckham expected Chapter 11 filings to plateau in the second and third quarters before peaking higher in the fourth quarter, but they warned that this forecast is tied heavily to an assumed economic recovery. "If things don't go back up in six months — if we don't get the hockey stick [recovery] — it will be hard for many oil and gas firms," Beckham said.

Haynes and Boone is watching another tranche of loans to E&Ps. A number of companies took out five-year loans during the last oil crisis in 2017, and they are coming due in 2022. "There's a bubble of 2017 borrowers — they can't refinance," Clark said.