A tumultuous past and uncertain future regarding the energy industry has led to an increase in energy companies filing bankruptcies.
Fuel Fix reported that three more mid-sized energy businesses recently followed suit in this ominous trend and filed for bankruptcy. In the last two years alone, over 200 companies in the drilling and oil field sector have declared various forms of bankruptcy.
Memorial Production Partners is just the latest, filing for Chapter 11 to restructure $1.3 billion in debt. The reasons being given for the action are clear-cut—a combination of falling oil prices and a reduction in the amount of financing available to the company.
Reuters reported that many enterprises within the energy industry and its sub-sectors have struggled to cope with the massive drop in price of crude oil, which fell below $100 per barrel in 2014 all the way down to a record-low of $20, and have yet to reach and remain above the $50 mark for an extended period of time. Analysts don’t believe that prices will achieve the $50 level with any degree of permanence for at least another fiscal year.
Other energy firms recently filing for Chapter 11 include Forbes Energy Services and Bonanza Creek Energy of Denver. The former has already structured a deal with creditors, while the latter aims to reduce nearly $850 million in debt and also raise $200 million in equity as part of the transaction.
It’s likely the past year won’t be so much an aberration as a trend. Alternative energy generation and energy storage are gaining momentum, and that means smaller or mid-sized players in the market likely won’t be able to hold on much longer, Gary Evans, former CEO of Magnum Hunter Resources, told Reuters.
“Everybody was able to hold on for a while, but once the hedges roll off you can’t support that debt.”
One route that companies are taking to stave off insolvency is by improving operating and supply chain efficiencies while simultaneously re-evaluating pay structure to determine if lower price points are an option. If successfully done, this can enable a firm to survive in a lower-cost environment, and is the strategy that Bonanza Creek chief executive officer Richard Carty wrote about in a public statement about the company’s bankruptcy.
It’s nevertheless likely that energy companies’ days as a wealth management vehicle are over. To make this point, Reuters highlighted Linn Energy LLC, which acquired massive debt in order to grow its operations and to increase payout to shareholders. Linn also received numerous tax benefits that allowed it to turn high profits and pay that back to investors, despite only producing roughly 60,000 barrels per day. The company, now saddled with debt and facing a bleak outlook on crude oil prices, had to file bankruptcy.
Even though energy prices are recovering, many of these companies face an uphill battle to return to normal operations. One thing is clear, though. Businesses that have skilled and experienced lawyers are finding an opportunity to restructure their debt in a bid for a second chance.
For more articles confirming this trend of energy company bankruptcies, check out: