Energy Sector Update: Bankruptcies Beleaguer Shale Producers
People around the world, troubled by a global health emergency, are hoping the curve will flatten out. A unified force in all areas is making concerted efforts to eradicate the novel coronavirus pandemic from the earth. However, this task seems daunting and time consuming. In fact, no sector has been spared from this rapidly spreading deadly virus, especially the energy room.
The coronavirus chaos bothered most utilities, especially offshore drilling companies. As the decline in oil prices and the decline in business activity due to the pandemic weakened demand for offshore drilling services, the affected companies remained debt-ridden with no access to credit.
Of the seven largest offshore drills, Diamond Offshore Drilling DOFSQ, as well as three other companies, Noble Corporation NE, Seadrill Limited and Valaris Plc VALPQ, either sought protection from Chapter 11 creditors or were already beginning debt restructuring talks to avoid bankruptcy. These companies typically use the Reformation process to streamline and improve their balance sheet positions for a safer debt profile while continuing to focus on safe, reliable, and efficient contract drilling for their global clients.
Aside from the offshore drills, the sharp drop in oil prices resulted in several shale producers going bankrupt. Not so long ago, the United States became the world's largest oil producer, led by shale companies producing approximately 13 million barrels per day (bpd). However, shale drilling typically suffer from severe decline rates resulting in rapid depletion of the wells. As a result, operators must continue to drill new wells to make up for the barrels of oil produced that are lost. This led most of the shale producers to borrow heavily to finance their operations.
With the collapse of oil prices, activity in the shale region eventually became economically uncertain amid massive capital burns, depressed yields and enormous debt. What followed was a series of bankruptcies.
The slate producer Oasis Petroleum OAS recently applied for Chapter 11 bankruptcy protection after the oil price crash caused by coronaviruses dried up available capital in the energy industry. The company filed for Chapter 11 with the intent of improving its financial position and significantly reducing its debt.
Last month, another utility, Whiting Petroleum Corporation WLL, recovered from bankruptcy and its property was made public on the New York Stock Exchange. Whiting Petroleum filed for Chapter 11 bankruptcy on April 1, 2020 and eventually overcame the crisis through a grueling realignment process on September 1. The company was the first publicly traded shale producer to file for bankruptcy after the historic collapse in crude oil prices in March.
Some shale companies such as Lonestar Resources, Chaparral Energy, Extraction Oil & Gas XOGAQ, Lilis Energy, Ultra Petroleum and currently Chesapeake Energy CHKAQ in 3rd place (Hold) had problems making profits before the outbreak of the coronavirus, which is why they have all filed for bankruptcy. The full list of today's Zacks # 1 Rank (Strong Buy) stocks can be found here.
Is a short-term trend reversal possible?
Oil prices between $ 45 and $ 50 per barrel are considered the break-even point for most shale operators. This means that crude oil prices must be locked to at least $ 45 in order to balance their operating cash flow with investments. While U.S. oil prices have risen a little lately at the prevailing price of crude oil of around $ 47 a barrel, it is unlikely that a large number of companies will break even in cash flow. Given that COVID-19 will stay here for a while, along with the resulting economic turmoil, a strong recovery in the U.S. shale industry will be difficult to achieve anytime soon.
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