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Sanchez bankruptcy follows efforts to regain footing amid crude price volatility

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Sanchez bankruptcy follows efforts to regain footing amid crude price volatility

Despite taking steps to avoid the action, Sanchez Energy Corp. added its name on Aug. 11 to the list of oil companies filing for Chapter 11 bankruptcy reorganization.

The independent exploration and production company was founded in 2011 and has focused on horizontal development of resources in the Eagle Ford Shale in South Texas.

Sanchez Energy was once among the top 10 public oil and gas producers in the Eagle Ford. The company had a market capitalization of $237.9 million on Aug. 10, 2018. But after a challenging first half of 2019, market capitalization tumbled to $5.5 million on Aug. 12.

Net income available to shareholders, despite the company's standing, has been negative since 2014, according to S&P Capital IQ data.

In 2018, Sanchez Energy generated more than $1 billion of annual revenue for the first time in the company's history. Nonetheless, it closed 2018 with a $3.5 million net loss applicable to common shares.

Throughout much of 2018, the company focused on long-term organic growth in the context of rising commodity prices, President and CEO Tony Sanchez III said in the fourth-quarter earnings release. The company readjusted its focus at the end of the year as oil and natural gas prices fell sharply. Drilling activity was significantly reduced to focus on capital preservation and maximize the company's liquidity position, the CEO said.

By the end of the first quarter, amid the backdrop of weak commodity pricing, Sanchez Energy reported that production was down 4.6% from the fourth quarter of 2018. The company reported a net loss of $67.3 million, compared to net income of $119.4 million in the fourth quarter of 2018 and a net loss of $4.8 million in the 2018 first quarter.

Although energy prices improved since a 2016 downturn when the crude oil price averaged in the $40/bbl range, Sanchez Energy has been struggling to generate enough cash to manage its debt obligations. The main bankruptcy petition for Sanchez Energy lists nearly $2.16 billion in total assets and more than $2.85 billion in total debts.

Attempting to avoid the bankruptcy measure, Sanchez Energy tapped investment bank Moelis & Co. as its financial adviser in December 2018 in efforts to boost its balance sheet and maximize its value. That month, the NYSE notified Sanchez Energy that its stock had traded for 30 days below the $1 per share minimum requirement and was slated for delisting, and the following month Sanchez Energy's average market capitalization fell below the threshold of at least $50 million over 30 consecutive trading days.

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Sanchez Energy said it would submit a plan of definitive actions to bring it into conformity with the market capitalization listing standard, but the NYSE delisted the company's shares in February, saying that it did not submit a plan.

In July, the company delayed making an interest payment on senior notes to continue "ongoing constructive discussions with its bondholders and other stakeholders on a comprehensive restructuring plan that would significantly reduce debt and strengthen its overall financial flexibility," according to a July 15 news release.

Following the announcement, S&P Global Ratings downgraded Sanchez Energy's long-term issuer credit rating from CCC to CC, its issue-level ratings on the company's senior secured debt from B- to CCC and its senior unsecured debt from CCC- to C, with a negative outlook.

Ratings said it believes the company decided to defer the payment to preserve liquidity ahead of another coupon payment due Aug. 15 from its 7.25% secured notes maturing 2023.

"Over the last year, we have taken proactive steps to address the challenging oil and natural gas price environment, including stabilizing our production profile, improving our capital efficiency and reducing our overall cost structure," Sanchez said in an Aug. 11 press release. He said the financial restructuring through a voluntary Chapter 11 is the next phase for Sanchez Energy as it works with creditors on a plan to right-size the company's balance sheet.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.