Between January 2015 and mid-2020, about 69 of the approximately 2,160 small-to-medium independent oil companies operating in the tight oil sector filed for Chapter 11 protection.
These filings mostly occurred in 2016 and 2019. A lack of financial discipline and poor financial risk assessment meant that these companies were negatively impacted by the low oil prices in these years. Hence, they declared bankruptcy.
"News outlets tend to amplify bankruptcy filing announcements in the oil sector. Such reports may suggest that the shale oil and gas sector is on the verge of extinction. We, therefore, assess whether this suggestion is accurate. Our analysis shows that neither these bankruptcy declarations nor future declarations imply that the US tight oil production is on the verge of collapse," Majed Al Suwailem and Malik Selemankhel, researchers at King Abdullah Petroleum Studies and Research Center (KAPSARC), have argued in their paper.
"First, although ailing operators have filed for bankruptcy protection in the last few years, their combined oil production is relatively small. Specifically, they collectively produced about 8.5 per cent of the total US; tight oil production in 2019 was estimated to be 7.75 million barrels per day.
"This volume did not disappear from the market. Instead, distressed operators are given a grace period during which they can operate without interruption. In this period, they can file motions to continue the use of cash collateral to preserve their businesses, including royalty and surety obligation payments," they said.
The researchers added: "Second, even when operators choose to sell their assets to pay off debts, these assets are sold to more efficient operators. These operators, in turn, may choose to develop them, use them for production, and generate revenues. In other words, ownership changes do not dilute the value of these assets, and the reserves do not disappear. On the contrary, during a fire sale, the buyer acquires assets at favorable terms."
Over 33 independent companies emerged from bankruptcy after successfully reaching resolutions with their investors on debt restructuring, transferring equity ownership to investors, or selling or leasing their assets to other operators.
Those who failed to adapt simply exited the oil market through either liquidation or being acquired by other companies.
Some independent companies that filed for bankruptcy in 2019 are still in the process of reorganising. Much of this delay is being caused by the Covid-19 pandemic. Many operators faced challenges and had to revise their plans for restructuring their business models.
This year, investors in distressed tight oil operators are highly likely to favour returns over growth. In particular, their positions in these companies have likely been increased owing to increased debt-for-equity swaps. The biggest winners are perhaps the secured debtors whose positions increased because of these equity swaps.
Going forward, more defaults are expected in the shale industry. More independent producers, especially medium-to-large ones that accrued arduous debts in previous years, will enter bankruptcy owing to fears of financial headwinds and market uncertainty.
The industry should aim for more market efficiency, consolidation and financial discipline through bankruptcies, possible mergers and acquisitions, and capital shifts toward carbon neutrality.
"A bankruptcy may be a positive or negative outcome in the tight oil sector, depending on the situation and perspective taken. Operators, equity owners, debtors-in-possession and the industry all have different perspectives on these bankruptcies. Overall, however, bankruptcies are never healthy, and they incur different types of costs and losses to many parties," Al Suwailem and Selemankhel said.
*An extended version of this report can be found online at www.ognnews.com
