More than 40 oil and gas companies in the United States filed for bankruptcy protection in the first eleven months of this year, according to Haynes & Boone’s latest report. Their cumulative debt load is $24.732 billion. And yet, things in the U.S. oil patch may not be as bad as the number of bankruptcies might suggest.
Bloomberg Intelligence recently reported the value of oil and gas bonds trading at a distressed level in mid-March totaled $144 billion. By the end of November, this was down to $37 billion. And analysts expect a lot fewer bankruptcies next year.
“The weakest have been culled from the herd,” says Bloomberg Intelligence analyst Spencer Cutter. “Most of the remaining companies may not be making much or any money with oil at $45 and natural gas below $2.75, but they have the liquidity to ride things out for awhile.”
Not all agree on the liquidity issue. Becky Roof, an adviser with AlixPartners, told Bloomberg that “There’s so much liquidity that used to be available to this market, and it’s gone.”
“Any company that is planning on a traditional refinancing, there are just much fewer sources available now because it’s an industry that’s out of favor.”
Indeed, oil and gas has fallen out of favor with lenders and investors, and this will make its recovery slower and harder but based on expectations of a rebound in economic activity thanks to mass vaccinations, the industry is also set for a rebound. Related: Oil Extends Losses As Demand Fears Resurface
As the bankruptcy trend suggests, not all will live to see this rebound. Yet, those that do survive will likely be even leaner and meaner than the survivors of the first shale crisis in 2014. Shale drillers this year managed—motivated by the pandemic and its effects on the industry—to reduce their breakeven costs by about 20 percent. This means the average breakeven cost per barrel of U.S. shale oil is now $45, according to BloombergNEF. That’s down from $56.50 a barrel on average last year.
West Texas Intermediate is currently trading at about $2 per barrel above this breakeven, so that’s good news for those above the average. Many producers are still losing money on each barrel they produce, however. Some of these will go under, and others will be acquired by rivals, just like it happened during the last crisis.
Opinions differ on whether there will be a new shale oil boom in the United States. Some argue that there may well be one as the industry recovers, cuts costs further, and benefits from the recovery of the global economy after the pandemic begins to subside. Others are skeptical because of the onslaught on the oil industry as a polluter. Banks and investors alike seem to have grown tired of U.S. shale’s growth-at-all-costs approach that they have little to show for. In the future, this may well need to change.
“For most of my career, we would reinvest all our cash flow and then show our success by how much we could grow our production,” the chief executive of Concho Resources said earlier this year. “Well, that’s not how it’s going to work in the future.”
Whatever the immediate prospects, the worst may well be over both for shale and conventional oil and gas in the U.S. Goldman Sachs expects Brent to average $65 per barrel next year, and this means WTI may be well above $50. Even those less bullish than the investment bank seem to agree that prices will be higher next year than they were this year. And this is all the good news U.S. oil and gas needs to start mending. Financing will be tougher—likely much tougher—but with the change of approach suggested by Concho’s Tim Leach, producers may return to growth soon enough.
By Irina Slav for Oilprice.com
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Irina Slav
Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.
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