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

[Rasmus Jorgensen + 1,169]

22 hours ago, James Regan said:

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

Have you seen Seadrills latest numbers? And Borrs? It's gonna get a lot worse before it gets better and a new round chap 11 may even be required... 

[Rasmus Jorgensen + 1,169]

22 hours ago, Jan van Eck said:

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." 

As I understand it the challenge facing at least chunks of the shale industry cannot be fixed by kicking the can down the road. They need fresh cash for drilling, that means that if capital markets contract then other solutions will be forced...

[James Regan + 1,776]

10 minutes ago, Rasmus Jorgensen said:

Have you seen Seadrills latest numbers? And Borrs? It's gonna get a lot worse before it gets better and a new round chap 11 may even be required... 

John Fredriksen is no mug and SDRL continue to operate internationally, decline drastic but definitely worth a punt as a penny stock.

Edited September 4, 2019 by James Regan

[Rasmus Jorgensen + 1,169]

5 minutes ago, James Regan said:

John Fredriksen is no mug and SDRL continue to operate internationally, decline drastic but definitely wort a punt as a penny stock.

JF is definetly no fool. His move to get out from under the Deep Sea supply liabillities was brilliant. That said, I believe SDRL will survive, but I would advise anyone thinking of investing to wait for the next round of restructuring. It's coming. 

I believe in offshore longterm, especially deepwater, but a big supply chain adjustment is needed. This was evident already in 2013... 

[James Regan + 1,776]

7 minutes ago, Rasmus Jorgensen said:

JF is definetly no fool. His move to get out from under the Deep Sea supply liabillities was brilliant. That said, I believe SDRL will survive, but I would advise anyone thinking of investing to wait for the next round of restructuring. It's coming. 

I believe in offshore longterm, especially deepwater, but a big supply chain adjustment is needed. This was evident already in 2013... 

SHHH 🤐- I am with SDRL today, I will get the scoop.......

[wrs + 893]

11 hours ago, Jan van Eck said:

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.

As a landowner I can promise you I would never agree to it.  We have had several companies go bankrupt while owning our leases and what they do is sell the lease to another operator to raise cash.  The lease itself holds the reserve value of the minerals as long as PPQ is maintained so that is the priority for the operator.   The lease might be encumbered by a lien and if so, then it's value is reduced and if the property isn't producing much, maybe they abandon it.  However, the stuff out in the Permian has so much oil down there that is known, no one is pumped out yet so the lease will be sold, not renegotiated.

The whole reason we have a shitty 1/8 lease with XTO is because a lease that was signed by my ancestors in 1950 was maintained in force for 65 years by several different operators. XOM owned the deep rights after severing the shallow stuff and selling them in 1970.  Incredibly, under Texas law, the deep rights were maintained by the shallow lease without XTO spending a dime to exploit them all those years.  Lease writing has gone from advantage oil man to advantage land owner these days.

 

Edited September 4, 2019 by wrs

[Otis11 + 551]

13 hours ago, Jan van Eck said:

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."  

I appreciate your patience with my lack of understanding here - While I haven't gone through any bankruptcy filings of any type, some 'business partners' (for lack of a better term) have. One example I watch what was otherwise a good company - and a pleasure to work with - go through chapter 11. It was my impression that they had huge amounts of background debt and liabilities that were so significant, they had no hope of ever paying them off. They went through chapter 11 and are now - apparently - in a much better financial position. During this whole process and still today they are a great partner - their services have not changed, neither did their costs, and they didn't void any open contracts. (Even their personnel stayed the same)

I don't have access to their financials, but, from my perspective anyway - it appears they went to their creditors and essentially said 'our assets are significantly less than our debts, we have no real chance of paying this off, we can re-negotiate some of this debt and come back as a successful company, or we can declare bankruptcy and pay you pennies on the dollar.' Because the amount of debt they negotiated to retain was still larger than the liquidation of their assets would have produced, they agreed this was in both parties best interests and agreed on a Chapter 11.

This is where I say the 'got out from under their huge saddle weights'. I maintain that they were and are well run - as the personnel didn't change (or at least not noticeably - they revamped their structure slightly, but it's all the same people) and they are great to work with. It seems they had a historical mistake weighing them down that they now lessened.

What here am I mis-interpreting or misunderstanding?

13 hours ago, Jan van Eck said:

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.

Agreed with everything you said. In most cases the contract will be sold as is and the new owner will take over the royalty payments on the same conditions. That said, if the contract were negotiated at a time when prices were unreasonably high, and the landowner got a sweetheart deal on it, the payment requirements may be too erroneous that no one is willing to take it over - which is where I believe the course of action would be to either re-negotiate the royalties, or place the rights back on the open market and try to find a better deal. While this would be the discretion of the land owner at this point, in many cases I'd expect it better to stick with the current operator and re-negotiate. They have the existing surface infrastructure, so it's likely to be worth more to them than someone brand new. (Even if the surface infrastructure goes to the new operator, changes in standards, takeaway contracts, etc, provide some entrenched advantage to the current operator - assuming they are competent operators)

3 hours ago, James Regan said:

John Fredriksen is no mug and SDRL continue to operate internationally, decline drastic but definitely worth a punt as a penny stock.

Careful with that one... I took that gamble back in 2009 thinking the chances of failure were well lower than the changes of several painful years and a good recovery. I was wrong. Lost $70k on that one. (Also know when to get out - looked like I had made a good bet and the stock started to recover before it went belly up.)

2 hours ago, wrs said:

As a landowner I can promise you I would never agree to it.  We have had several companies go bankrupt while owning our leases and what they do is sell the lease to another operator to raise cash.  The lease itself holds the reserve value of the minerals as long as PPQ is maintained so that is the priority for the operator.   The lease might be encumbered by a lien and if so, then it's value is reduced and if the property isn't producing much, maybe they abandon it.  However, the stuff out in the Permian has so much oil down there that is known, no one is pumped out yet so the lease will be sold, not renegotiated.

The whole reason we have a shitty 1/8 lease with XTO is because a lease that was signed by my ancestors in 1950 was maintained in force for 65 years by several different operators. XOM owned the deep rights after severing the shallow stuff and selling them in 1970.  Incredibly, under Texas law, the deep rights were maintained by the shallow lease without XTO spending a dime to exploit them all those years.  Lease writing has gone from advantage oil man to advantage land owner these days.

 

Thanks for your perspective WRS. While this may be true for most situations, would the case I described above not be feasible? Why not?

[Boat + 1,323]

A lot of attention has been paid to oil debt. To add a little perspective Apple has around 250 billion in cash laying around. Berkshire Hathaway over 100 billion along with Google over 100 billion. So in conclusion it seems silly to talk chump change debt compared to the much bigger story of why do companies overcharge and rack up huge personal wealth and huge company balance sheets.

The masses and the poor are exploited while politicians ignore their plight. 

[Jan van Eck + 7,558]

20 minutes ago, Otis11 said:

What here am I mis-interpreting or misunderstanding?

Nothing.  What made that one work was the part you are not considering: the unsecured trade creditors got either nothing or pennies, usually pennies  (typical is about 6% or less).  The "vote" on the Plan of reorganization is done by classes of creditors. To "confirm" the Plan, it must have the support of certain percentages of creditors in each creditor class and certain numbers of creditors.  If creditors fail to vote, then that class can be ignored.  Usually what happens is that the unsecured creditors walk away, the Plan is crafted and confirmed by the secured creditors, and the unsecured debt is valved off.  I have seen cases where the unsecured stuff is greater than the secured debt.  So the secured creditors get to laugh all the way to the bank,  might exchange some debt for equity shares, and the unsecureds get stiffed.  Happens every day in America. 

[Jan van Eck + 7,558]

4 minutes ago, Boat said:

The masses and the poor are exploited while politicians ignore their plight.

It is always that way.  Way of the world and the people in it.  You don't seriously anticipate that the rich are going to take the shaft, now do you?  It is always the poor who get screwed over.  Just lovely. 

[wrs + 893]

1 hour ago, Otis11 said:

Thanks for your perspective WRS. While this may be true for most situations, would the case I described above not be feasible? Why not?

Our leases always have a clause that the lessor should not unreasonably withhold a transfer of the lease to a buyer.  We usually have some conditions in there regarding the financial status of the buyer but otherwise the lessee is free to convey the lease as long as all of the covenants and terms are maintained.  In that case, the assignee will know what they are getting and would be willing to pay the lessee.  Here is some language from a recent lease.

 

1.                   The rights of either party hereunder may be assigned in whole or in part and the provisions hereof shall extend to the heirs, executors, administrators, successors, and assigns of the parties hereto.  Notwithstanding the foregoing, no assignment of this lease by Lessee, in whole or in part, shall be valid or of any force and effect unless the following conditions, as applicable, are met: 

(a)                 Lessee may assign an undivided interest, or a series of undivided interests, in the entire lease, or any portion thereof, so long as Lessee (i) remains liable for all covenants, terms, provisions, conditions and obligations under this lease incurred prior to the assignment and (ii) remains secondarily liable for all surface restoration and/or reclamation obligations and all plugging and abandonment obligations ;

(b)                 This lease, or any portion thereof, shall not be assigned without the express prior written consent of Lessor.  Withholding of written approval by Lessor because of the financial condition of the proposed assignee or of Lessor's opinion regarding the business reputation of any proposed assignee shall be deemed reasonable by all of the parties hereto, their respective heirs or successors and assigns.

(c)                 Any assignment of this lease, in whole or in part, by Lessee to an assignee of Lessee shall contain a provision whereby such assignee expressly assumes all covenants, terms, provisions, conditions and obligations of this lease and the assignee must execute such assignment in order for same to become effective.  Lessee shall notify Lessor in writing of its intention to assign the lease, or any portion thereof, prior to making such assignment.  Such notice shall contain the identification of the proposed assignee and a description of all terms and conditions of the assignment.  If within 15 days after receipt of such notice, Lessor objects in writing to the proposed assignment on the grounds that the proposed assignee is not financially or technically capable of assuming any or all covenants, terms, provisions, conditions and obligations of the lease, then such proposed assignment shall not be approved or completed.  Lessor's approval to any proposed assignment may be withheld for any reason; and

(d)                 Lessor shall be furnished within 30 days after the execution of any assignment a certified copy, or photocopy of a certified copy, of the recorded assignment. 

 

I couldn't tell you if others have been willing to renegotiate their lease just to keep the production in force but I guess that it may have happened but we have never been asked to do it.  Our most recent assignment was from Halcon to another operator when Halcon was going bankrupt the first time back in 2016.  That lease has a 25% royalty.

[ronwagn + 6,290]

Lea County mostly. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Edited September 4, 2019 by ronwagn

[Ward Smith + 6,615]

1 hour ago, ronwagn said:

Lea County mostly. 

Looks like Southern New Mexico to me

[Rasmus Jorgensen + 1,169]

16 hours ago, Otis11 said:

One example I watch what was otherwise a good company - and a pleasure to work with - go through chapter 11.

 

16 hours ago, Otis11 said:

I don't have access to their financials, but, from my perspective anyway - it appears they went to their creditors and essentially said 'our assets are significantly less than our debts

 

16 hours ago, Otis11 said:

What here am I mis-interpreting or misunderstanding?

You can argue that if a company allows their debt to reach unmanageable levels then it is not a well-run company. Just being a pleasure to work with doesn't make it well run.

[Rasmus Jorgensen + 1,169]

19 hours ago, wrs said:

As a landowner I can promise you I would never agree to it.  We have had several companies go bankrupt while owning our leases and what they do is sell the lease to another operator to raise cash.  The lease itself holds the reserve value of the minerals as long as PPQ is maintained so that is the priority for the operator.   The lease might be encumbered by a lien and if so, then it's value is reduced and if the property isn't producing much, maybe they abandon it.  However, the stuff out in the Permian has so much oil down there that is known, no one is pumped out yet so the lease will be sold, not renegotiated.

 

15 hours ago, wrs said:

I couldn't tell you if others have been willing to renegotiate their lease just to keep the production in force but I guess that it may have happened but we have never been asked to do it.

It really depends on your longterm view on where oil prices are going. If you believe @William Edwards we have a lot more suffering coming and the minerals in the gound will be worth less in the longterm. So, I guess a bird in the hand vs 10 on the roof could make sense in some cases. 

[Porterman + 2]

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.

 

I actually agree. Chevron and Exxon have used the words "derisk" when allocating capital to the area (beats Venezuela or Libya). They are not a bunch of clowns. My initial comment was somewhat tongue in cheek.  Both of those companies are still weighing potential aqusitions per their comments this week at a conference in NY. The shale short party is in the late innings. 

[Tom Saunders + 1]

I certainly hope SKEP's "STRONG HANDS" prevail and prevent collapse, but unquestionably the industry is under pressure.

I heard that a lot of frackers' debt is held by regional S&L's, who themselves are not quite in the pink of health. 

My second-hand info suggests these S&L's remain in great danger should oil fail to rise significantly from current levels - truly a major economic downdraft for many communities, perhaps the country.

As an investor my concern is financial, but as a human my greater concern is the people, families, and communities impacted. 

So rather than intricacies of bankruptcy law, I encourage comments on the accuracy of my hear-say opinion, and how we may lessen the potential hurtful impact on those whose lives may be affected by shale industry difficulties.

 

[footeab@yahoo.com + 2,187]

On 9/4/2019 at 8:13 AM, Boat said:

A lot of attention has been paid to oil debt. To add a little perspective Apple has around 250 billion in cash laying around. Berkshire Hathaway over 100 billion along with Google over 100 billion. So in conclusion it seems silly to talk chump change debt compared to the much bigger story of why do companies overcharge and rack up huge personal wealth and huge company balance sheets.

The masses and the poor are exploited while politicians ignore their plight. 

And you ignore the tens of ,thousands, nay, hundreds of thousands of companies that went belly up over same time period, yet pretend the couple companies which hit it big, over several decades to create their cash piles, are now permanent oligarchs.  Idiots like you said same thing about GE, GM, Ford, etc etc etc.  Where are they now?

[Boat + 1,323]

13 hours ago, footeab@yahoo.com said:

And you ignore the tens of ,thousands, nay, hundreds of thousands of companies that went belly up over same time period, yet pretend the couple companies which hit it big, over several decades to create their cash piles, are now permanent oligarchs.  Idiots like you said same thing about GE, GM, Ford, etc etc etc.  Where are they now?

It works like this. If a company wants money a risk is assigned that determines the interest rate the company must pay to attract an investor. Nobody twists the arm of the investor or forces them to loan out money. However if enough interest offered/assigned an investor may choose to gamble and loan that money out. Since you seem incapable of understanding simple basic principles who would be the idiot. 

[footeab@yahoo.com + 2,187]

7 hours ago, Boat said:

It works like this. If a company wants money a risk is assigned that determines the interest rate the company must pay to attract an investor. Nobody twists the arm of the investor or forces them to loan out money. However if enough interest offered/assigned an investor may choose to gamble and loan that money out. Since you seem incapable of understanding simple basic principles who would be the idiot. 

AH, you switch the subject.  You are the one with their panties in a knot because they have billions of cash on hand and playing make believe they are evil incarnate. 

And all owners/investors are not equal.  Many are loans who do not get stock nor dividends nor seats on the board.  On new companies the investor are those who MADE the company to begin with like Google, Apple, etc if they wish to keep cash instead of throwing away their leverage against poorly run companies that is their decision. 

These are new companies whom your panties are in a wad about where the majority of stock is still not in oligarchs hands, but rather individuals who created the business and are all on the board or rule the board.  This changes when they die and inheritance tax strips their descendants of ~50%.  Who can buy these shares to pay the tax?  Not an individual, not the descendants unless there is a gigantic pile of cash on hand.  Giant banks/mutual funds(AKA pension funds) do have this ability.

GM, GE board members are NOT individuals, but rather oligarch investment firms whose board members all jump from one fund to another taking golden parachutes along the way(banks by another name)etc who do not give one damn about the future of the company as long as status quo is sustained .  Which is why they all fail while new companies take their place.  Why these trash zombie companies are all in massive massive debt.  These are the companies an honest Lefty like you should be PISSED at. They are run by banksters and oligarchs.   The investment oligarchs drained them of working capital so they cannot make good honest products, advertise the good products and stay with it, rather the investment firms who bought the inheritance of those who started the company and made it s good name are milking the good products with mediocre cheap, outsourced trash till the good name company dies when their good name gets destroyed and eventually everyone buys someone elses products or you have MONOPOLY because the oligarchs have allowed FREE trade which means they all get to run the medicore low end products OFF SHORE where no regulations etc and new companies CANNOT compete because they cannot even afford a building in which to start. 

[Gerry Maddoux + 3,627]

I've read the above notes and, as usual, have learned some things. But the "human" feature seems absent: George Mitchell is actually the giant of this story. He was the old Greek immigrant who changed his name so people could pronounce it, and had a peculiar way of looking at things, especially oil-soaked hard rock. For twenty years, he fought the ornery "Tombstone Rock," trying to figure out how to get natural gas (then very scarce) from the black shale of the Barnett Basin, picked over and easily purchased for pennies. His own son tried to get him kicked off the board in order to save the company. Finally, George figured out the rudiments of hydraulic fracturing. The rest is history. The pioneers of fracking weren't just brave, but lived on the edge too. Chevron and Exxon doubted the myth around Tombstone Rock for years, then watched while all the mistakes were made, until they could swoop down to compact and industrialize a failing shale industry. 

What they're doing in the Permian is very likely prelude to handling the best rock in the world: the Vaca Meurta. The shale layers down there are twice as thick as in the Permian, deep-earth pressures are much higher, and there are abundant natural fractures in the rock. It should be noted that the shale of Vaca Meurta is best of class, more like the marl that is prevalent underneath the Austin Chalk and above the Buda Shale down in the crescent strip of land coming up from the Eagle Ford. Anyway, the shale is mixed with limestone (like the Delaware) but it's altogether easier to fracture the rock. The Vaca Meurta should be huge. If the politics don't get in the way, a break-even in Vaca is judged to be truly about $25.  

But again, Exxon and Chevron wouldn't have a clue how to handle the Vaca--it would be just another ugly piece of land--were it not for the unusual mind of the Greek immigrant with the made-up name, Mr. George Mitchell. This business is not just about dollars and cents, but the color of how history shaped the way oil is harvested from the ground. I'm proud to be involved in the shale oil and gas business, even though it is going through a painful stretch. I'm not a deepwater guy, though I think Gulf of Mexico offshore is becoming great again. It's hard for me not to believe that some smart cookie will come up with some way to constantly or intermittently stimulate the cream d'la creme shale wells, greatly improving upon their catastrophic decline rates. Of all the wells that have been drilled, and will be drilled in the future, I strongly suspect that some sort of stimulation or repeat fracking will be used at least in the top 10% of producers. Mark Twain was fond of saying, I believe the news of my death has been premature. I feel the same way about shale. 

[DanilKa + 443]

On 9/3/2019 at 8:07 PM, James Regan said:

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

Operations as in “producing” but not “drilling and completing” which require capital - lack of which got you into Ch11 situation. Care to guess decline rates? Red Queen curse is a thing... 

[Boomer1776 + 2]

19 hours ago, DanilKa said:

Operations as in “producing” but not “drilling and completing” which require capital - lack of which got you into Ch11 situation. Care to guess decline rates? Red Queen curse is a thing... 

You have no idea what Seadrill actually does, do you?

[DanilKa + 443]

6 hours ago, Boomer1776 said:

You have no idea what Seadrill actually does, do you?

Dude, I work in the industry. As for  SDRL - it’s my second largest loss. Shareholders were effectively wiped out in the bankruptcy. 

Now that we done with your personal attack - are you disputing what I’m saying about availability of capital for drilling while under Ch11? 

[Tom Kirkman + 8,860]

Just a gentle reminder, it's probably bettet to stay focused on issues and away from personal areas.

While there is lots of joking and friendly banter and amusing kidding on this forum amongst long-time members who know each other fairly well online, it can be fairly easy to misread the intentions of newer member's comments online, as there is no posting history.

Just sayin.