It’s been a rough year for the oil industry. According to Debtwire, as of mid-July, North American upstream energy service enterprises with more than $45 billion in secured debt, have filed for bankruptcy.
The reason why so many exploration and production companies are going under is due to plummeting profits. Casey Research noted the price of oil has decreased 75 percent since 2014, but what factors spurned this activity?
Too much supply, not enough demand
Oil production companies across the globe are producing more energy than consumers demand. The World Economic Forum noted U.S. domestic production has doubled in the past three years or so, reducing the amount of foreign oil the nation needs to procure.
In Iraq and Iran, production and exports have also grown annually. After world leaders lifted economic sanctions on the Iranian government, it kicked its oil economy into gear, adding to the globe’s exorbitant supply of oil. Historically, whenever oil prices plummeted, the member nations of the Organization of the Petroleum Exporting Countries usually cut production to increase prices, but the WE Forum noted this hasn’t happened as of yet.
How are oil companies responding?
Most E&P companies struggling to stay in the black simply filed for Chapter 11 bankruptcy. According to The Deal, the number of Chapter 11 bankruptcy filings rose 22 percent between the second quarter of 2016 and the third quarter 2016. Lindsay Rittenhouse, one of The Deal’s bankruptcy reporter’s noted this trend will likely continue unless OPEC settles an agreement to cut production.
“On a positive note, Chapter 11 filings mean oil and gas producers have the financing; including lenders willing to provide debtor-in-possession loans, and the assets worth saving to carry out the lengthy and costly process of a bankruptcy case for reorganization, rather than succumbing to a complete shutdown,” said Rittenhouse.
Deloitte also weighed in on the tactics oil companies are taking to mitigate the effects of low prices, noting many oil companies are optimizing their existing operations to lower production costs. For example, from the second quarter of 2014 and the third quarter of 2015, shale oil producers reduced expenses by 25 percent.
Innovation will have a big role to play in the E&P industry’s recovery. By applying the latest technology and restructuring processes to reduce costs, oil companies may be able to get out of the red.
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