Could There Be a Wave of Oil Bankruptcies?

The COVID-19 pandemic has sent shockwaves through the global oil and gas industry, with analysts warning the impact could trigger an upsurge of bankruptcies among shale companies. Despite WTI prices rising to around US$40 a barrel, experts say it’s not enough to save many companies from going broke.

After a sharp drop in oil prices in Q4 2018, the number of companies filing for bankruptcy had already embarked on an upward trend. Now, the pace is accelerating as cash-hungry oil producers face a gloomy long-term price outlook alongside enormous debts racked up over the past few years.

WTI recovery not enough to save shale producers

Already, more than 20 US energy companies have filed for bankruptcy in 2020. All were plagued with more than US$50 million in liabilities. According to Bloomberg data this level of economic failure hasn’t been seen since the oil price collapse in 2016. While WTI prices have recovered to around US$40 a barrel since crashing in April, analysts warn it may not be enough to save many US oil and gas drillers from plunging into insolvency.

Oklahoma City-based fracking company Chesapeake Energy is one of the latest casualties, filing for Chapter 11 protection at the end of June. The company borrowed heavily to finance its shale drilling activities and while it hoped to earn back its investments Chesapeake has now been forced to engage with creditors and redistribute a huge US$7 billion of its debt. Independent oil and gas producer Sable Permian Resources and Texas-based Lilis Energy were also among the companies filing for protection from creditors.

Bankruptcy “a long time coming”

While some analysts blame the COVID-19 pandemic, others say the heavy borrowing was always going to end in disaster. In 2017 American energy entrepreneur Harold Hamm warned some companies were at risk of “drilling themselves into oblivion.” Now this prediction appears to be gaining traction.

“This filing has been a long time coming,” says Wood Mackenzie analyst Alex Beeker. “It was likely going to happen with or without Covid-19. If I were to describe Chesapeake in one word, that word is ‘excess’ - excess liabilities, excess costs, excess gas in an oversupplied market.”

With the oil and gas industry in flux, a new opportunity has emerged for biofuels. Find out more in ‘Rapid and Accurate Analysis of Sulphur and Chlorine in Biofuels by XRF’ with insight from application-specific X-ray analysers manufacturer, XOS.