Lessons From The Latest Oil & Gas Bankruptcy Filing
Oil prices have bounced back from the lows of 2016, but weaker E&P companies continue to fail.
Today, we analyze the events leading up to the recent failure of Vanguard Natural Resources, LLC. This bankruptcy case study reminds us of the common financial markers of public companies on the financial edge, and how a commonly used metric to detect financial risk in private companies often fails to deliver a timely warning for public ones.
Learn to dodge the next bankruptcy bullet in time to mitigate your risk:
Read the Vanguard Natural Resources bankruptcy case study
In a cyclical downturn, financial resilience is key
Oil and gas commodity prices are up, and industry demand is much improved compared to a year ago. Prices over $50 per barrel have restored many E&P companies to profitability, and while increased U.S. oil and shale production has created strong price head winds, most forecasts hold that recent OPEC production cuts will stabilize prices above this benchmark.
Despite these positive trends, however, bankruptcy filings in the early weeks of 2017 show that higher prices come too late for Forbes Energy Services Ltd., Bonanza Creek Energy Inc., Memorial Production Partners LP, and now Vanguard Natural Resources.
These recent oil and gas bankruptcies remind us that all too often, highly leveraged companies are unable to weather the financial stresses that accompany a downturn, or hold out for higher commodity prices until normal market conditions recover. In the face of inevitable downturns, especially with cyclical companies, financial resilience is still key.
What went wrong for Vanguard Natural Resources?
Let’s take a look at a partial list of red flags leading up to Vanguard Natural Resources’ February 1 bankruptcy filing:
- Vanguard had accumulated $2.3B in debt due to a series of acquisitions made when money was cheap -- well in excess of assets, at the time of the bankruptcy filing.
- Vanguard consistently ranked in the bottom quartile of their peers for key measures of financial health, such as operating income, profit, interest coverage and debt to assets.
- The company showed recurring net losses all the way back to 2015, and ran short of cash to maintain operations and service debt as prices and demand dropped.
- Financial distress signals included missed interest payments, debt agency downgrades, a sharply declining stock price and subsequent delisting, and many others.
- Vanguard’s FRISK® score of ‘1’ was deep in the red zone, for the entire year leading to the bankruptcy filing.
To see all the markers of financial distress leading up to this bankruptcy filing, as well as the early warning signs based on a full five sequential quarters of financial data, refer to the full Vanguard bankruptcy post-mortem. Download the complete bankruptcy case study here.
Key Learning: DBT Index Fails to Detect Risk
There’s another important learning from this case study: Had you been watching the DBT Index for Vanguard, you wouldn't have gotten a timely heads up of Vanguard’s weakening financial condition.
That’s because Vanguard, like many public companies, had broader capital facilities to draw down as working capital became strained. So they continued to pay on time, right until they filed for bankruptcy, with no degradation of payment behavior.
Only the FRISK® score predicted Vanguard’s deteriorating financial health and ultimate bankruptcy in a timely way, by taking a much wider range of metrics into account — market data, financials, even crowdsourced behavioral click data from other credit professionals.
The FRISK® score gave you a leg up on Vanguard’s financial distress, even when payment-based scores did not.
Note: The Altman Z''-score, which can be a great predictor of risk for certain situations, is sometimes too early to help maintain profitable sales opportunities. In this case, some of the data needed to calculate this risk score was NA.
Dodge Your Next Bankruptcy Bullet
Our goal with this series of case studies is to help you detect and reduce exposure in a timely fashion, especially for companies most at risk of a future bankruptcy filing in your portfolio.
Need a better way to get a leg up on your biggest credit risks, when payment-based scores fall short? To learn how to get a timely warning before your next public counterparty files Chapter 11.
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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.