Another bankruptcy filing has analysts bracing for a wave

Source: Nathanial Gronewold, E&E reporter • Posted: Friday, July 17, 2015

Analysts are predicting an acceleration of bankruptcies and industry consolidation in oil and gas for the rest of the year as yet another exploration and production company moves into organized restructuring.

Yesterday, Sabine Oil & Gas Corp. became the latest victim of the 50 percent plunge in global crude oil prices that began in late 2014. The company reported to investors and on its website that it filed for Chapter 11 bankruptcy protection in federal court.

Federal court records confirmed the filing, which came five days after Arabella Petroleum Co. LLC turned up in court records as also having filed for Chapter 11 protection from creditors.

Sabine’s filing prompted an alert from Fitch Ratings that more such filings were to come in short order. Debt stress is growing, and creditworthiness ratings are falling as the price bust seems set to linger on for several more months.

The industry is now being invited to take a second look at its crude price assumptions for next year, as robust U.S. production, weak demand growth and the anticipated return of Iranian oil supplies to Europe all cast a pall on a price recovery that was expected to near $70 per barrel by early 2016. In a new notice, Moody’s Investors Services predicts oil prices in 2016 will average $60 to $65 per barrel, increasing to the $70 per barrel range internationally in 2017.

West Texas Intermediate (WTI) crude prices, the benchmark most important to U.S. oil and gas companies, is seen as averaging $55 per barrel for this year, according to Moody’s.

Sabine’s management said the company will continue operating as usual during the financial restructuring. Executives there put blame for the company’s problems squarely on the drop in crude oil pricing. Sabine is active in the Eagle Ford Shale and Texas Panhandle.

“The Company expects that its cash on hand, combined with funds generated from ongoing operations, will provide sufficient liquidity to support the business during the balance sheet restructuring process,” Sabine’s management team said in a release.

Fitch said that debt defaults and bankruptcy filings in the exploration and production sector are causing the overall energy industry high-yield debt default rates to climb quickly. Fitch analysts report that Sabine’s outstanding bond debt is trading at less than 20 percent of “par value, indicating the market currently anticipates weak recovery rates.”

Moody’s explained its bearish oil price estimate is based on the assumption that a global oversupply is unlikely to ease until 2017. Analysts there said again that would-be sellers are proving unwilling to part with companies and assets at terms that buyers are willing to pay. But Senior Vice President Terry Marshall wrote in an overview that attitudes will likely change moving into fall and on to next year.

“High bid/ask spreads have created a significant impediment to M&A [mergers & acquisitions] dealmaking, helped in part by a strong rebound in oil prices to around $60 per barrel of oil equivalent (boe) by mid-2015, up from the low $40s/boe in January,” Marshall said. “However, oil prices have limited room to rise from here, given global oversupply that is unlikely to abate through at least mid-2017.”

Hercules Offshore Inc., a Houston-based operator of offshore jack-up drilling rigs, is expected to be the next to file for court bankruptcy protection. On Monday, the company put out a notice soliciting votes from creditors on a reorganization plan. “A near-term bankruptcy filing seems highly probable,” Fitch declared yesterday.

Oil prices took another beating in the markets yesterday as it slowly dawned on traders that a possible normalization of trade in Iranian crude oil means another million barrels per day in output could come online from the Middle East within a year or possibly earlier. Prices recovered some after the U.S. Energy Information Administration reported a strong draw on domestic oil stockpiles.

WTI futures contracts were trading close to $51.60 per barrel at time of publication.

Yesterday also brought fresh signs of impending pain for even large oil and gas operators as companies prepare to disappoint investors and analysts with another round of gloomy quarterly financial reporting.

BHP Billiton, a mining giant that has been expanding into oil and gas production, warned its investors yesterday that it expects to write down the value of its assets by some $2.8 billion pre-tax. The company said it was forced to adjust after acknowledging that an onshore U.S. oil prospect in its control is too complex geologically to make it economic to develop at current crude oil prices. The U.S. Securities and Exchange Commission is expected to force a general industrywide reassessment of corporate value based on much lower per-barrel oil values later this year.