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Coronavirus, crude price wars combine to bring first large Chapter 11 filing

Highlights

Whiting filed in Texas bankruptcy court

IRRs fall to negative territory

Denver — Whiting Petroleum, a major oil and gas producer in the Bakken Shale and Denver-Julesburg Basin, announced Monday it had filed a Chapter 11 plan, as the decimated global demand for crude draws more blood.

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"Through the proposed terms of the plan of reorganization, we believe a right-sized balance sheet will enable us to capitalize on our enhanced cost structure, high-quality asset base and successfully compete in the current environment," Whiting CEO Bradley Holly said in a statement.

"Given the severe downturn in oil and gas prices driven by uncertainty around the duration of the Saudi/Russia oil price war and the COVID-19 pandemic, the company's board of directors came to the conclusion that the principal terms of the financial restructuring negotiated with our creditors provides the best path forward for the company," he added.

The plan was filed with the United States Bankruptcy Court for the Southern District of Texas. It's the largest bankruptcy filing in the US oil and gas sector of 2020 as Whiting has a total of $5.89 billion in combined secured and unsecured debt.

Whiting is most active in the Bakken and Three Forks plays in North Dakota and the Denver-Julesburg Basin in Colorado. Both of these regions, along with all oil-rich plays in the US, have come under extreme financial duress during the current price crunch.

Average internal rates of return per well in the Bakken fell to an unheard of minus 4.5% in March, according to S&P Global Platts Analytics. IRRs in the play were nearly 40% one year ago. The DJ has fared even worse, with IRRs dipping to minus 6.3% compared to 20% a year prior. Producers typically need IRRs at 20% or higher to incentivize more drilling.

Platts Analytics IRRs are based on a half-cycle, post-federal corporate tax analysis, which excludes sunk costs such as acreage acquisition, seismic and appraisal drilling.

The poor returns have led to idled rigs and shut-in wells. Continental Resources, the largest producer in the Bakken, has stopped all drilling and shut in most wells in the play last week. Continental had reduced its production through May by 30% before the latest price crash and suspended its dividend.

Bakken production is already showing declines due to producer pullbacks. Bakken sample associated-gas production last week averaged 1.8 Bcf/d, down from 2.1 Bcf/d the week prior, according to Platts Analytics. This reflects the latest forecast, which calls for 1.8 Bcf/d next month, down 268 MMcf/d from April, which would register as the largest month-on-month decline ever recorded in the Bakken. Smaller declines are expected in the coming months, until hitting 1.5 Bcf/d in July. This was anticipated due to continued shut-ins throughout the play.

The average well in the Bakken produces 60% oil, 20% gas and 20% natural gas liquids.