The second quarter of 2020 was not kind to independent oil and gas producers, with 18 filing for bankruptcy. That was the second-worst quarter in a half-decade, but more significant pain may be yet to come.
The bankruptcy total for the second quarter trailed only the 34 in the second quarter of 2016 since Haynes and Boone LLP began monitoring the segment in 2015. In a discussion of the latest results, partner Charles Beckham said things will likely be worse in the second half of the year.
"We definitely have not bottomed out. There's still a number of very large companies that are marching towards a need for restructuring," Beckham said. "The commodity price simply hasn't come back enough to bail some of these companies out."
When asked if the number of bankruptcies in the third quarter could exceed 20, Beckham responded, "Yes, you could [see more than 20]."
"It's just a steady trend. It's hard for many of these companies to get out of the way of that falling rock," he said.
The independent producers who entered bankruptcy in the first half of the year took more than $30.6 billion in debt with them, more than any other full year in the past half-decade save for 2016. A huge portion of that came from the more than $9 billion in debt held by Chesapeake Energy Corp. when it entered bankruptcy in late June, but the former trendsetter was not alone.
"Chesapeake is the biggest and a poster child of the [shale] revolution, but they're not the only ones who were willing to borrow as much money as anyone could give," Beckham said. "It's all led to a lot of destruction of value … [The amount of debt] is staggering. I'm anticipating the numbers for the third quarter will be the same."
There appears to be more than ample reason for such pessimism: West Texas Intermediate crude prices are hovering in the low $40 per barrel range, well below break-even prices for many independents with the greatest debt issues. Compounding the issue is a lack of support from capital markets, which Beckham described as "fatigued" from investing in oil and gas producers with little return. This most recent downturn could be the breaking point for independents referred to as "zombie companies" that were capable of keeping their doors open and little else.
"There's a combination of a lack of commodity price and no confidence in the capital markets to kick the can down the road further. There's no patience out there," Beckham said. "Even if they were interested, I don't think the commodity markets could come back fast enough to bail some of these companies out today. There's too much debt and not enough interested capital."