During the first quarter of 2020, oil markets—as well as the markets for other commodities and equities—saw unprecedented volatility and declining prices amid rising concerns over the economic effects of COVID-19. Initially, oversupply in the oil market, in addition to the price war between Saudi Arabia and Russia, caused prices to drop precipitously, as was the case following the OPEC+ meeting in March. This supply surplus and simultaneous demand decrease due to COVID-19 sent oil prices spiraling down to an 18-year low.

As effects of the oil price war and coronavirus pandemic continue to be felt, it’s becoming increasingly clear that the energy industry is likely to face substantial headwinds in 2020 and that many companies will be forced to restructure. Saudi Arabia and Russia, and potentially certain US state energy regulators such as the Texas Railroad Commission, are the main actors to watch as high supply and low demand overwhelm available storage capacity. Many oil-producing countries that rely on energy-related income for a substantial portion of their national revenue have adopted austerity measures and spending cuts as they aim to endure the oil bust.

Government and Industry Response to COVID-19

The Coronavirus Aid, Relief, and Economic Security (CARES) Act

On March 19, the US Senate introduced the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the continued spread of the COVID-19 pandemic. In a bipartisan effort, the Senate passed the $2 trillion economic stimulus bill, which was signed by the President on March 27. This legislation is aimed at providing relief for individuals and businesses that have been negatively impacted by the coronavirus outbreak and would provide significant administrative and liquidity enhancements for dealing with the current crisis. The assistance includes tax relief and government loans, investments and grants, and accounting and financial reporting relief for entities that can demonstrate a need for additional time to file due to the virus.  Despite lobbying efforts, however, there are no specific provisions of the CARES Act targeted towards the energy industry.

Texas Oil Drillers Consider Cutting Production; Pace of Layoffs Increasing

In a letter to the Texas Railroad Commission, Pioneer Natural Resources and Parsley Energy urged the TRC to allow cutbacks to production. The companies requested a virtual meeting no later than April 13 “for the purposes of determining the reasonable market demand for oil, whether wasteful production either is occurring or is reasonably imminent, and, if so, the necessary and appropriate proration order to prevent such waste.” Bloomberg reported that one corner of the US oil market has seen the first record of negative crude prices in history. Wyoming Asphalt Sour, a dense crude oil used mostly to produce paving bitumen received a negative 19 cents per barrel bid from trading house Mercuria Energy Group Ltd. in mid-March, effectively asking producers to pay to offload their output. Texas Railroad Commissioner Ryan Sitton has been in contact with Saudi leaders and was invited to an upcoming OPEC meeting to discuss potential solutions to the oversupply position.

Oil and gas companies are reacting quickly to adjust their cost structures in response to the precipitous decline in oil prices. Apache Corp. announced another round of layoffs after reducing its Permian rig count to zero. This follows their announcement in January of the closure of their San Antonio office. In addition, Halliburton announced the furlough of 3,500 workers for two months to help address the steep decline in oil prices.

Reorganization Efforts

Debtwire’s Data on Transactions report for the first quarter documents six new Chapter 11 bankruptcy cases in the Oil & Gas and Energy Conglomerate sectors.

McDermott International, Inc. filed for bankruptcy in late January. In mid-March, the plan for reorganization was approved by the court and calls for eliminating more than $4.6B of debt and clearing the way for a $2.7B sale of its Lummus Technology unit to Chatterjee Group and Rhone Capital. McDermott had full support from secured creditors for the plan but faced resistance from some equity holders, whose shares will be canceled under the plan. Proceeds from the sale will be used to repay the Debtor-in-Possession (DIP) financing in full and provide liquidity post-emergence.

A Fort Worth-based natural gas driller received the final court order which allows them to draw down on the remaining $70 million in DIP financing after resolving final objections from holdout creditors. An attorney for Shearman & Sterling LLP has described the outcome as “a pretty soft landing into Chapter 11” which the company filed in late January. The order provides much needed liquidity while completing the remaining court proceedings.

San Antonio-based oil field service company Pioneer Energy Services Corp., which provides drilling and production services to oil-and-gas companies in the United States and Colombia, filed for bankruptcy protection at the beginning of March. A handful of investment firms, including Credit Suisse, Ascribe Capital and Loomis, Sayles & Co., are poised to take control under the prepackaged bankruptcy plan that strikes a debt-for-equity swap with bondholders and erases about $260 million in debt from the company’s books.

Oil-field-services company CARBO Ceramics Inc. filed for bankruptcy protection after reaching a deal with its senior lenders on a debt-for-equity swap. The Houston-based company, which provides ceramic technology used by shale drillers that rely on hydraulic fracturing, filed with a deal that hands control of the company to senior lenders owed $65 million, Wilks Brothers LLC and Equify Financial LLC.

Riveron brings energy companies an uncommon agility, applying extensive technical accounting, finance, and operations expertise to accelerate the timeline and impact of change. Our experienced team, including restructuring experts from Riveron, have sat on all sides of the table from executive roles in accounting and operations to investor roles in private equity and investment banks. We understand the unique challenges facing the energy industry and partner with our clients to achieve exceptional results.