3 More Energy Industry Bankruptcy Filings in January 2017

Despite rising oil prices, the Surge of Oil and Gas Bankruptcy Filings Isn't Over yet

Is the surge of oil and gas bankruptcy filings finally over?

In their recent bankruptcy report, Haynes and Boone lists 114 industry participants that have filed for bankruptcy since 2015. A look at the monthly filings through 2016 shows that the rate of E&P and oilfield services company bankruptcies has indeed slowed.

But while the worst appears to be behind us, it’s a bit premature to celebrate just yet. Many companies are still high-risk, and for the unsecured creditors of financially distressed companies that fail, a sunnier industry outlook offers little consolation.

By way of example: four energy industry participants failed from mid-December 2016 to January 2017: Stone Energy Corp., Forbes Energy Services Ltd., Bonanza Creek Energy Inc. and Memorial Production Partners LP.

Here’s a look at current industry financial risk, and a review of the warning signals that led up to the recent wave of January bankruptcy filings.
 

Oil & Gas Industry Bankruptcy Risk: An Update

During the course of 2016, 24 publicly traded companies filed for bankruptcy, with over $47 billion in debt, more than twice the level we saw in 2015. “Borrowings that seemed prudent when oil was topping $100/bbl aren’t sustainable with prices now at about half that level”, explains a recent Bloomberg article.

Fast forward to 2016 year-end: with demand up, and OPEC’s recent intervention, oil prices have steadied over $50/bbl. Natural gas prices also climbed higher. So, is industry financial distress a thing of the past?

For perspective, we turn to the FRISK® Stress Index. It measures the average bankruptcy risk for a group of publicly traded companies -- for instance, across an SIC code, a country, even a portfolio.  Our data shows:

  • Of the 500 FRISK®-scored North American companies that we track in SIC code 13, 308 have a FRISK® score in the ‘red zone’ (higher than average bankruptcy risk). Of these, 27 have a bankruptcy risk of ‘1’ on a 10-point scale. A FRISK® score this deep in the red zone suggests a probability of failing up to 50% in the next 12 months.
  • Internationally, many companies are also at risk. Of over 1000 FRISK®-scored companies in this SIC code worldwide, over half are higher than average bankruptcy risk, with a FRISK® score in the ‘red zone’. Some notable default risks: Petroleos de Venezuela, S.A. (PDVSA), with $13 billion in high-yield debt at risk of default, and Brazil’s Odebrecht Offshore Drilling, with $3 billion in outstanding debt at risk of default, according to OILPRICE.com.
  • Bankruptcy risk for U.S. public oil & gas extraction companies (SIC code 13) is +194% compared to a more benign period before the last recession. This level of bankruptcy risk, while half of what it was at the peak of the crisis, is still double what we typically see in a healthier industry, on average (see graph below)
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January, 2017 Bankruptcy risk for U.S. public oil & gas extraction companies

Three New Oil and Gas Bankruptcy Filings

For these financially distressed E&P and oilfield services firms, deep losses coupled with plummeting cash flow resulted in insufficient funds to sustain operations and service debt. Despite asset sales and other financial maneuvers, resources and time simply ran out. All three will file for bankruptcy in January, 2017.

Bonanza Creek Energy Inc.:
The Denver-based shale driller filed for bankruptcy on Jan. 4. Early signs of deep financial distress include:

  • Multiple rating-agency downgrades
  • FRISK® score of ‘1’, deep in the red zone
  • Inability to sell assets or access debt and capital markets, to raise sufficient cash
  • Change in directors and management
  • Missed interest payment, restructuring advisors hired
  • Long-term debt reclassified as short term, after breach of debt covenants
  • Sequential quarters of deepening losses, working capital declines, cash flow deficit, negative returns, and many other signs of weakening financial performance. (Source: CreditRiskMonitor)


Memorial Production Partners LP:
The Houston-based oil & gas producer announced plans to begin a Chapter 11 filing by Jan. 16, after many months of deteriorating credit metrics and liquidity struggles. Signs of financial weakness include:

  • Rating-agency warnings ahead of debt covenant violations, followed by downgrades
  • FRISK® score ‘1’, deep in the red zone
  • Cost cutting and suspension of quarterly dividend
  • Reduced credit facility, missed interest payment, debt-restructuring activities
  • Auditor and management warnings in the MD&A
  • Successive quarters of deepening losses, insufficient cash flow from operations, negative returns, and weakening financial ratios. (Source: CreditRiskMonitor)
     

Forbes Energy Services Ltd.:
On December 21, 2016, the troubled Texas oilfield services contractor announced plans to file a Chapter 11 plan on or before January 23. Bankruptcy red flags include:

  • FRISK® score ‘1’, deep in the red zone
  • Rating agency debt downgrades 3x in less than a year
  • Listing exchange warnings, followed by delisting
  • Missed interest payment, ongoing restructuring negotiations
  • Deteriorating quarterly financials, such as: growing losses, insufficient working capital, negative stockholders equity, inability to earn a return on capital, and the reclassification of outstanding debt as short-term, after violation of long-term debt covenant, to name a few. (Source: CreditRiskMonitor)

 

How to Detect Oil & Gas Financial Distress

Each failed company presents a telltale pattern of red flags, which we’ve seen for dozens of failed industry participants in recent years -- such as Stone Energy, Ultra Petroleum Corp. and the Swift Energy Company, to name a few.

While some of these high-stress companies have used the bankruptcy courts and equity markets to restructure and recapitalize, many others incurred deep losses when prices plummeted, and remain at high-risk.

Here's how credit managers can detect financial stress early enough to head off losses:


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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.