ZeroHedge: Oil And Gas Bankruptcies To Accelerate As $137 Billion Debt Matures Over Next Two Years

[Tom Kirkman + 8,860]

The Tylers weigh in.  Might be a good idea to consider their thoughts.  Full article in the link:

"A Murderer's Row": Oil And Gas Bankruptcies To Accelerate As $137 Billion Debt Matures Over Next Two Years

Oil and gas companies are facing an onslaught of bankruptcies as the "shale revolution" appears to be coming to an unceremonious end, at least on Wall Street, according to the Wall Street Journal. 

Companies like Sanchez Energy Corp., Halcon Resources Corp. and 26 other oil and gas producers have all filed for bankruptcy this year, already matching the 28 industry bankruptcies from all of 2018. The number is expected to rise as debt maturities for those looking to cash in on the shale revolution and make bets on higher oil prices years ago are now looming. 

5.7% of all energy companies with junk rated bonds are defaulting as of August, the highest level since 2017. The metric is "considered a key indicator of the industry’s financial stress."

The defaults are on the rise as companies struggle to service debt, bring in new money and refinance existing debt. The once-darling shale business model has been under significant scrutiny from Wall Street over the last 18 months, adding to the headwinds for many companies. 

Investor interest has faded after years of meager returns while, at the same time, companies struggle to meet their cost of capital with oil prices below $60/barrel. 

Private companies and smaller drillers have felt the most pain thus far. These companies "collectively generate a large portion of U.S. oil," and their distress is indicative of wider distress throughout U.S. shale. 

Patrick Hughes, a partner at Haynes & Boone said: “They were able to hang in there for a while, but now their debt levels are just too high and they’re going to have to take their medicine.” 

...

[Douglas Buckland + 6,308]

Man, didn’t see that one coming!😂

[James Regan + 1,776]

Wow Tom it took you that long to realize, you should have told us sooner😂

[Jan van Eck + 7,558]

The logical solution for Wall Street is to do nothing to upset the apple cart, and roll over those maturity dates and forego their interest coupons. That way, the shale companies can hunker down, continue to extract oil, and eventually make payments as a return of capital.  At this point, the Street is faced with "return of capital," not "return ON capital."  They can take what they can get, and be content, because the alternative is ugly enough:  nobody gets anything. 

The idea that in bankruptcy you can force a bulk sale of assets under Sec. 363 of the Code, and thus resolve creditor claims, is a fantasy.  In those deals, very little is paid out to the investors.  The buyers know it is a forced sale and there is zero incentive to pay anything related to par. 

[James Regan + 1,776]

15 minutes ago, Jan van Eck said:

The logical solution for Wall Street is to do nothing to upset the apple cart, and roll over those maturity dates and forego their interest coupons. That way, the shale companies can hunker down, continue to extract oil, and eventually make payments as a return of capital.  At this point, the Street is faced with "return of capital," not "return ON capital."  They can take what they can get, and be content, because the alternative is ugly enough:  nobody gets anything. 

The idea that in bankruptcy you can force a bulk sale of assets under Sec. 363 of the Code, and thus resolve creditor claims, is a fantasy.  In those deals, very little is paid out to the investors.  The buyers know it is a forced sale and there is zero incentive to pay anything related to par. 

Even after filing for Chapter 11 you can still continue Operations take Seadrill as an example!

[Douglas Buckland + 6,308]

As I am not a ‘finance’ guy, I’ll take what Jan says as rational and reasonable, regardless of his cheese fixation...

That said, wouldn’t a knock-on effect of this bankruptcy issue be a serious lack of faith in the industry, by Wall Street, resulting in lack of further investment in the shale oil industry?

[Old-Ruffneck + 1,221]

6 minutes ago, Jan van Eck said:

The logical solution for Wall Street is to do nothing to upset the apple cart, and roll over those maturity dates and forego their interest coupons. That way, the shale companies can hunker down, continue to extract oil, and eventually make payments as a return of capital.  At this point, the Street is faced with "return of capital," not "return ON capital."  They can take what they can get, and be content, because the alternative is ugly enough:  nobody gets anything.

Jan, 

I think really it's about 6 months to 9 months beyond repair. Of the 28 filings most are very small. 127 divided by 28 = 4.5 mil each...

[Jan van Eck + 7,558]

5 minutes ago, James Regan said:

Even after filing for Chapter 11 you can still continue Operations take Seadrill as an example!

All true.  But here's the problem: in Chapter 11, the Debtor has to propose a Plan, up front, that sets out how the Debtor is going to reorganize.  The Plan has to provide for a greater return to creditors than a simple liquidation.  If the Court finds that continued operations will result in "spoliation," or a waste of assets, then either the Court or the creditors' committee will propose a Section 363 bulk sale of assets.  Bye-bye company.  The assets will disappear, typically into the maw of a competitor. 

And now you know why corporate bankruptcy law firms get  paid the big bucks.

[Jan van Eck + 7,558]

7 minutes ago, Douglas Buckland said:

That said, wouldn’t a knock-on effect of this bankruptcy issue be a serious lack of faith in the industry, by Wall Street, resulting in lack of further investment in the shale oil industry?

Nah.  Wall Street never learns.  Those guys are driven by greed, and they will be jumping back in.  Is the Street still bundling housing loans into securities?  Of course.  Did they learn anything from 2008?  Nope. 

[Douglas Buckland + 6,308]

Well that just sucks! I thought at some point common sense would prevail. Silly me.

[Ward Smith + 6,615]

7 hours ago, Jan van Eck said:

Nah.  Wall Street never learns.  Those guys are driven by greed, and they will be jumping back in.  Is the Street still bundling housing loans into securities?  Of course.  Did they learn anything from 2008?  Nope. 

One big difference from 2008 is there's no AIG whoring its AAA credit rating and "insuring" those "bundles". Absent that, the systemic risk is lower and the yield is higher, as it should be. That also limits which institutions get to "invest"and cuts out several who shouldn't. 

Speaking of risk, these oil bonds were called "junk" for a reason and junk bonds failing to be repaid is just par for the course. They were purchased in small tranches by multiple players chasing yields, and they spread their bets so they don't have too much exposure to any individual asset class. So they lose, but they don't really care because it's all opium (OPM, other people's money). 

Edited September 3, 2019 by Ward Smith
Imprecise language previously

[SKEP + 229]

35 minutes ago, Ward Smith said:

One big difference from 2008 is there's no AIG whoring its AAA credit rating and "insuring" those "bundles". Absent that, the risk is lower and the yield is higher, as it should be. That also limits which institutions get to "invest"and cuts out several who shouldn't. 

Speaking of risk, these oil bonds were called "junk" for a reason and junk bonds failing to be repaid is just par for the course. They were purchased in small tranches by multiple players chasing yields, and they spread their bets so they don't have too much exposure to any individual asset class. So they lose, but they don't really care because it's all opium (OPM, other people's money). 

It's about time.

Cull the weak sisters.

Healthy for Sale industry

[wrs + 893]

5 hours ago, Douglas Buckland said:

Well that just sucks! I thought at some point common sense would prevail. Silly me.

You apparently missed the whole TARP show.

[zbest1966 + 10]

So that means Nat price will be increased, what happen to Nat Gas price?  Nat gas has been low for the last 10  yrs there is bound tobe disruption.

[Ward Smith + 6,615]

Quote

Other shale drillers, like EP Energy Corp., have also missed debt payments. EP missed a $40 million interest payment due August 15 as it continued to struggle from the debt piled atop of it as a result of an Apollo-led buyout in 2012. 

I wonder how many other companies were "pushed" by poor acquisition metrics? Apollo is pretty notorious for their "investment" strategy in "buyouts".

[Porterman + 2]

Tom, Question. A KKR backed group spent $925 mill on some Concho proterties today in northern new mexico. Are they just taking a flier on much higher cl prices? Also, any idea how some of these companies (permian guys) are gonna pay for the buybacks they have announced? I would assume issuing debt for those is not an option.

[Otis11 + 551]

10 hours ago, Jan van Eck said:

All true.  But here's the problem: in Chapter 11, the Debtor has to propose a Plan, up front, that sets out how the Debtor is going to reorganize.  The Plan has to provide for a greater return to creditors than a simple liquidation.  If the Court finds that continued operations will result in "spoliation," or a waste of assets, then either the Court or the creditors' committee will propose a Section 363 bulk sale of assets.  Bye-bye company.  The assets will disappear, typically into the maw of a competitor. 

And now you know why corporate bankruptcy law firms get  paid the big bucks.

But what about those who are looking to acquire additional acreage on the cheap? 🤐

[Jan van Eck + 7,558]

Just now, Otis11 said:

But what about those who are looking to acquire additional acreage on the cheap? 🤐

They wait for the Sec. 363 auction, and bid and buy on the cheap.  But remember, all they buy is the assets, not the Company, which then folds, along with the creditors.  The money from the bulk sale then gets carved up b y the court, first to the taxman and the other secured creditors, then to debt holders if they have a security interest somewhere, then to the unsecured creditors including bondholders, what is left goes to the equity owners.  In cases with highly leveraged companies drowning in debt  (sound familiar?), there is not enough for the bondholders, they take a hit. 

[Otis11 + 551]

11 minutes ago, Jan van Eck said:

They wait for the Sec. 363 auction, and bid and buy on the cheap.  But remember, all they buy is the assets, not the Company, which then folds, along with the creditors.  The money from the bulk sale then gets carved up b y the court, first to the taxman and the other secured creditors, then to debt holders if they have a security interest somewhere, then to the unsecured creditors including bondholders, what is left goes to the equity owners.  In cases with highly leveraged companies drowning in debt  (sound familiar?), there is not enough for the bondholders, they take a hit. 

Yes, I guess my point was less successful companies going out of business and having to sell their assets to companies that have managed to do well and be more efficient has a much better total effect than simply allowing those less successful companies to continue eking out a living...

Out here (West Texas and NM) it's incredible the inefficiencies I see constantly... yet they stay in business. Some have - quite literally - half the break even cost of others. Let them sink and their acreage cored up under someone who can operate it better!

I see those shouting that higher oil prices are necessary - and I haven't discounted it yet - but it's really hard to reconcile that with the egregious inefficiencies I see, coming from companies that are doing reasonably well. I understand some are saddled with unreasonable debt loads, others have painfully high royalty agreements, etc, etc, there are a lot of 'valid' reasons why they struggle ... but others are just poorly run. Let those well run file chapter 11 and get out from under their huge saddle weights, and let those poorly run hit Sec 363. 

Or am I overlooking something?

[Jan van Eck + 7,558]

1 hour ago, Otis11 said:

Or am I overlooking something?

Yes.  The bankruptcy code does not work the way you apparently think it does.  The idea that a company that is well run can go file Chapter 11 and "get out from under their huge saddle weights" will not work  (unless there is a pre-packaged Plan with the creditors' agreement before you go file).  You have to have a Plan that improves the creditors' positions above that of a liquidation, and you don't have that Plan if the company is "well run."  

You are not going to be able to vacate the royalty agreements with your new Plan.  the counterparty is effectively a secured creditor, and will apply for what is known as "relief from stay," and simply take his land and mineral rights back, essentially severing that contract and vacating the drill agreement.  It is a bit like a kid picking up his marbles and going home.  And the Judge is going to grant that stay relief.  The Company cannot pay the royalties on an on-going basis, so why should the landowner / rights-holder continue the arrangement?  The drill company would have to sign a "Reaffirmation Agreement" in order to keep the land under their control, and that re-affirmation would simply continue the current "onerous royalty agreement."  

You signed that Contract, so you have to live with it, or surrender the underlying asset, the land and drill rights.  There goes your Company.  How do you propose to have a company if it cannot drill and extract the oil?  

All those problems do go away IF the landowner agrees to a lower royalty as a part of a pre-packaged Chapter 11 Plan.  But why should he? There is no  motivation on the planet that would propel that arrangement, so I cannot even envisage any remote probability that the landowner would go for it.  Bottom line: that idea does not work.

[Jan van Eck + 7,558]

4 hours ago, Porterman said:

Also, any idea how some of these companies (Permian guys) are gonna pay for the buybacks they have announced? I would assume issuing debt for those is not an option.

Presumably they will pay for buybacks by the proceeds of the sale of assets.  SO they would have to sell some acreage to another at a nice price to free up the cash.  

[Jan van Eck + 7,558]

I remind readers here that, just because a drilling company does not have any cash and is barely eking out a living, and has a ton of debt due, that does not mean it is going bankrupt  (although undeniably it is a candidate).  There are lots and lots of those companies out there.  They are generically known as "zombie companies," and they stick around because it is too expensive and too painful to the creditors to go liquidate them.  Remember that bankruptcy laws are unique to each country.  For example, in the USA the emphasis is on the rehabilitation of the Debtor through the discharge of debt.  In Canada and the UK, the emphasis is on making creditors whole, or as close as you can.  Thus Canadian and UK law favors the use of Receivership, while  the US law has "Debtor in possession."  That makes a huge difference to the outcome. 

At one time there were lots of zombie companies in Japan, as that country underwent a painful asset deflation.  I think it is still continuing, albeit largely flattened a this point.  Nobody shut down the zombie companies, and the banks kept the loans to them on their books as assets, even though they did not perform and had no hope of performing.  The idea was to postpone the day of reckoning where the assets had to be marked down to market - what such a loan could fetch.  As the realistic answer was, Nothing, better to keep it on the books.  So the zombie companies continued, even were given fresh credits, just to keep them alive, as non-dead zombies.  The result of marking to value would have been far too painful, as the minimum reserve assets needed would have crippled those creditor banks. Trust this explains.

Edited September 4, 2019 by Jan van Eck

[ronwagn + 6,290]

6 hours ago, Porterman said:

Tom, Question. A KKR backed group spent $925 mill on some Concho proterties today in northern new mexico. Are they just taking a flier on much higher cl prices? Also, any idea how some of these companies (permian guys) are gonna pay for the buybacks they have announced? I would assume issuing debt for those is not an option.

Where in Northern New Mexico? 

[SKEP + 229]

14 hours ago, Porterman said:

Tom, Question. A KKR backed group spent $925 mill on some Concho proterties today in northern new mexico. Are they just taking a flier on much higher cl prices? Also, any idea how some of these companies (permian guys) are gonna pay for the buybacks they have announced? I would assume issuing debt for those is not an option.

Not all shale loses money. Half doing fine , half LOSERS.

LOSERS WILL BE GONE. SOME WILL REORANIZE AND CLEAN UP BALANCE SHEET.

SHALE PRODUCTION  IN TRANSITION FROM WEAK SISTERS TO STRONG HANDS.

 

Edited September 4, 2019 by SKEP

[Ward Smith + 6,615]

2 hours ago, ronwagn said:

Where in Northern New Mexico? 

Here's a link