Hang On in There, Baby—Financial Struggles, Chapter 11, Asset Sales, Asset Purchases

On Friday of last week, two more large E&Ps filed for Chapter 11 – Ultra petroleum with $3.8 billion in unsecured debt and Midstates Petroleum filing with a $2 billion debt-for-equity swap deal.  Over the past 18 months there have been 65 E&P bankruptcies – mostly small companies, but nine companies make up 75% of the $28 billion in total debt exposure of all of these firms.   This chaos in the oil, gas, and NGL markets is having all kinds of financial and strategic ramifications.  One of the consequences of all of the turmoil could be a wave of asset sales, demands for contract restructuring, and more bankruptcy proceedings.  But there can be some real opportunities in all this chaos if you know what to look for, understand where the needs and pitfalls can lie, and especially to recognize that “the sun’ll come up tomorrow.” 

For the last decade, the U.S. oil and gas industry has been very exciting.  It continues to be very exciting.  Of course, there are different kinds of “exciting.”  There’s skiing in the Rockies, hurtling down a steep slope at 35 miles per hour, with nothing between you and disaster but your skill and your luck.  That’s the kind of excitement some look for on purpose.  Then there’s driving home to Denver, hurtling down I-70 at 70 miles an hour and finding an unexpected patch of ice on a downhill curve.  That’s not the kind of excitement you go looking for on purpose.

From the mid-2000s to 2014, the oil and gas industry was the first kind of “exciting,” -- companies running and gunning to get out in front of competitors, developing a resource that changed the world by reducing the U.S. dependence on imported energy and pushing global markets into oversupply, with a disastrous impact on crude oil prices.  So for the last 18 months or so, the industry has been experiencing the second kind of excitement, the I-70-on-ice kind, where you depend on all of your skill and luck just to keep you from hitting something or going off a cliff.  Like I-70, this is not the kind of excitement you seek out.

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