E Companies

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.” 

U.S. oil and gas companies currently have hedge protection in place for less than one-fifth of their expected 2016 production, and the strike price of the remaining derivatives is significantly lower than in previous years. With a bleak gas price outlook for 2016, the result could be even more severe capital spending reductions, potential production curtailments, and increased financial stress for mid-size and smaller firms. In today’s blog, we examine what has happened to producer hedging protection and the implications for capital spending and production trends.