10 Of The Biggest Oil & Gas Bankruptcies Of 2016: Did You See Them Coming?

10 Of The Biggest Oil & Gas Bankruptcies In 2016: Did You See Them Coming?

If you believe the oil industry’s out of the woods, think again.

  • In 2015, 44 North American oil and gas producers filed for bankruptcy, representing approximately $17.4 billion in cumulative secured and unsecured debt. It sounds like – and was – a significant and worrying rate of bankruptcy. 
  • However, last year’s statistics are tame in comparison to 2016, with 61 producers with cumulative secured and unsecured debt of $50.6 billion biting the dust as of October. And we’ve still got over a month to go before the year end…
  • On a positive note, we’re finally seeing a slowdown in oil exploration and production (E&P) bankruptcies – but this has been replaced by a worrying upsurge in oilfield service company bankruptcy filings.
  • Having already reached $14.1 billion in cumulative debt in September with about 20 bankruptcies, October saw the number of filings in the oil field services sector soar. Eight oil field service providers filed for Chapter 11 restructuring in that month alone.
     

The good news: predictive risk scores and other financial red flags can alert you to growing risk.

Once you have a means to spot troubled oil and gas counterparties, you’re in a better position to mitigate these growing risks before it’s too late. And the more signs of financial distress you know, the better prepared you can be.

2016’s Biggest Bankruptcies: did you see them coming?

Our list below highlights 10 of the biggest oil and gas company bankruptcies this year. Did you see them coming?

With each of the 10 companies we’ve profiled, there’s a noticeable pattern of financial distress long before the bankruptcy filing. These include things like missed interest payments on debt, exploration and production cuts, and a declining FRISK® score.

Take a closer look; the warning signs were there. We spotted them, and you could have too:

  1. Pacific Exploration & Production Corp.: The largest private exploration and production company operating in Colombia had $5.4 billion in debt at the time of filing, making it the second largest E&P insolvency in the current down cycle, and one of the five largest ever recorded. At the time of filing in April, Pacific’s FRISK® score was deep in the red zone ( with a probability of failing as high as 50% over a 12-month period), and had declined from “3” to “1” in the space of just nine months. Recent restructuring has substantially reduced their outstanding debt.

  2. Ultra Petroleum Corp filed for bankruptcy last April, with almost $3.8 billion worth of debt. A declining FRISK® score went from “5” to “1” in the space of just half a year, revealing financial distress seven months before its Chapter 11 filing. This signal would have given Ultra Petroleum’s counterparties time to mitigate exposure to the company. Other red flags in the run-up to bankruptcy included Moody’s and S & P rating downgrades, and a net loss of $21.8 million in the company’s 2016 Q1 filing.
     
  3. Midstates Petroleum Company was $2.1 billion in debt at the time of its Chapter 11 filing, also in April 2016.  Just like Pacific, Midstates’ FRISK® score  tumbled from “3” to “1” between July 2015 and its 2016 filing. Following restructuring, Midstates has eliminated almost all its debt along with more than $185 million of annual interest expense. Its new capital structure consists of a $170 million first lien revolving credit facility maturing in 2020.  The company exits its restructuring with approximately $75 million in total liquidity and a business plan that projects positive free cash flow at current strip pricing.
     
  4. Energy XXI Ltd: The oil slump came at the worst possible time for this oil and gas explorer, hitting just after it bought EPL Oil & Gas Inc. for $1.53 billion. This constituted just one slice of $5 billion spent on acquisitions by Energy XXI over the years leading up to the crude crash. Last April, the company filed for Chapter 11 protection following a tentative $1.45 billion debt-for-equity swap agreement with a group of its bondholders. Energy XXI’s “2” FRISK® score , which lasted for almost a year before dropping to “1” at the time of its filing, would have alerted counterparties to a very high bankruptcy risk.
     
  5. Linn Energy, LLC: A series of large private equity-funded partnerships helped Linn become one of the largest energy producers in the U.S.  When this Texas-based oil and gas company filed for bankruptcy last May it was an eye watering $8.3 billion in debt, making it the largest company to have gone bankrupt in this downturn, according to law firm Haynes and Boone. Declining production and debt amounting to more than seven times the previous year’s cash from operations were clear signs of impending bankruptcy, as was a FRISK® score that sank from “3” in August 2015 to a “1” at time of filing. No amount of cost cutting could help them after prices fell.

  6. Breitburn Operating LP: Los Angeles firm Breitburn, a specialist in revitalizing old oil wells, was unable to revitalize itself following the oil and gas price crash. Its 2016 Q1 revenue dropped to $105.5 million, down from $139.7 million for the same quarter the previous year. Tanking sales and related financial metrics were clear red flags, as was a declining FRISK® score falling from “2” to “1” between March 2016 and the Chapter 11 filing in May.

  7. Sandridge Energy, Inc: A FRISK® score which had been firmly in the red zone at “2” since February 2015 was a clear bankruptcy warning sign for this Oklahoma City-based oil and gas producer. Following its Chapter 11 filing in May 2016, a swap of $3.7 million in debt for equity helped it emerge from bankruptcy in October with zero net debt and $500 million in liquid funds.

  8. Halcón Resources Corp.: Another highly leveraged Texas energy producer originally funded by private equity, Halcón has emerged, with $1.8 billion less in debt, less than a month and a half after a pre-packaged bankruptcy restructuring. Financial troubles stemmed from debt of $3.12 billion, and the crippling drag of 140,000 leased Utica Shale acres in Ohio that were never brought into production. A FRISK® score of “2” in January indicated financial troubles seven months before Halcón found itself filing for bankruptcy.

  9. Paragon Offshore Plc: This Texan oil services company spun off from parent company Noble Corp. just as the recent oil slump began. The decline in oil and gas prices meant this offshore rig owner wasn’t able to cope with the excess of new drilling vessels paired with a much lower customer spend. Paragon filed for bankruptcy in February 2016, due to debt caused by the spin off and the termination of long-term contracts with Pemex and Petrobras. A FRISK® score that fell from “3” in September 2015 to “1” indicated acute levels of financial distress for Paragon and a high risk of bankruptcy, 5 months prior to filing.

  10. Seventy Seven Energy, Inc: The devastating blow caused by the oil slump meant this oil-field services provider’s drilling division saw a 51% fall in revenue days in 2015, and its hydraulic fracturing section experienced sharply lower prices. This led to just $155 million in 2016 Q1 revenue, down from $430 million the previous year. A FRISK® score of “1” (falling from a “3” the previous June) showed the writing on the wall. By May, with $1.7 billion in debt, Oklahoma City-based Seventy Seven wiped out its common shares as part of a pre-packaged reorganization. After restructuring, they emerged from bankruptcy in July with reduced leverage and renewed growth prospects.

Energy Industry Outlook: Challenges Continue

It continues to be a challenging and volatile time for the energy industry, as the vicious cycle of overleveraged oil and gas companies continues:

  • Experts predict an oil surplus that will continue way past 2017, and prices are not expected to recover any time soon. 
  • Highly leveraged companies desperately need additional capital to keep lenders at bay, and to refinance debt as it comes due. With prices depressed, and reduced financing sources, more bankruptcies are triggered.
  • Longer term, the issue for distressed public companies is whether financing becomes more readily available. Commercial banks have been required to tighten their lending standards, and the market to refinance legacy debt in a lower (than $90) price environment is largely non-existent.
     

FREE Checklist: 19 Financial Warning Signs to look for

Almost two years into this cycle, it’s more crucial than ever to closely monitor the financial health of your oil and gas customers and suppliers, both before and after bankruptcy restructuring.

To help you target growing credit risk, we’ve come up with an informative checklist of 19 of the most common signs of financial distress.

Download this FREE resource to learn:

  • Eight common red flags to spot in financial statements and SEC filings in the months before bankruptcy
  • Eleven often ignored factors and financial risk indicators that signal growing distress
  • Three false alarms, that are either too early, too late, or too unreliable to be of any help
     

Stay ahead of oil and gas industry financial risk: download our 19 warning signs checklist today

2016 YTD North American E&P Bankruptcy Filings (w/debt over $1 Billion)
2016 YTD North American Oilfield Svcs Bankruptcy Filings (w/ debt over $1 Billion)

About CreditRiskMonitor

CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of over 58,000 global public companies.

At the core of CreditRiskMonitor’s service is its 96% accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z” score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.