We know 2015 was a bleak year for coal, oil and natural gas producers, with at least 67 bankruptcy filings. 2016 is not looking much better. Surpluses of coal, oil and natural gas continue to weigh down prices and threaten companies’ balance sheets. Revenues have dropped, choking off cash flows and making it challenging for companies to pay off their debt. Several large energy gas producers have filed for bankruptcy since the beginning of 2016, and almost weekly we see companies that, despite cutting jobs and slashing spending, cannot continue to wait for a turnaround.
Midstream companies could be joining the fray after the U.S. Bankruptcy Court for the Southern District of New York ruled from the bench in In re Sabine Oil & Gas Corp.[1] that midstream gathering agreements can be rejected as “executory contracts” by debtors in bankruptcy. Each sector needs to work off the excess fat. Their success in doing so will go a long way in determining whether energy markets remain in a slump or begin to rebound later in 2016.
Energy bankruptcies have been messy. Bankruptcies and auctions get slowed by complex capital structures that pit investors with competing interests against each other. Most bankruptcies end up in liquidations with asset pools consisting mostly of real estate, machinery and equipment, and inventories. The total revenue generated from these sales has been disappointing to say the least. For instance, Dune went belly-up owing $144.2 million; its assets sold for $20 million. American Eagle Energy Corp. filed for bankruptcy with debts of $215 million; its properties sold for $45 million in October. BPZ Resources Inc. owed $275.2 million; its assets fetched about $9 million. Endeavour International Corp. went into bankruptcy owing $1.63 billion; the company sold some assets for $9.65 million and handed over the rest to lenders. As valuation and liquidation expert Mark Weitz said, “In my close to 40 years of handling commercial dispositions and auctions, it has been a long time since I can remember a sector getting hit so hard in such a condensed period of time.”
With all the energy equipment hitting the market at the same time, the concern has been that a glut will cause lack of demand and thus decreases in value. While that has been true for certain types of equipment such as drilling rigs, drill pipe and specialized tools, other types of more universal equipment such as vehicles, yellow iron, and parts and supplies have continued to maintain a better percentage of book value, generating reasonable revenues for bankruptcy estates. This is mainly because this type of equipment has cross-over appeal to various industries outside the energy sector both domestically and internationally. We do not expect to see drastic changes in either the state of the energy sector or its impact on the value of assets at any time in the foreseeable future.
When it comes to energy policy, the next president and members of the next Congress will play a critical role in shaping America’s 21st century energy renaissance, determining whether our nation will cement its position as a global energy leader. The energy policy conversation is about more than oil and natural gas development. It is about American competitiveness, international influence, national security, and long-term economic strength and prosperity.