Bankruptcies leave a smaller, more financially sound energy industry

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Through Allison McNeely to 12/18/2020

(Bloomberg) – Better days may be ahead for energy companies after a busy year of bankruptcies, with the coronavirus pandemic wiping out weaker borrowers and investors, predicting a strong economic recovery when vaccines become widely available.

About $ 144 billion in energy bonds were trading at troubled levels in mid-March, when the pandemic plunged demand for oil, but that number fell to $ 37 billion in late November. That’s because some oil and gas companies have filed for bankruptcy attorney while others have seen their fortunes rebound, according to Bloomberg Intelligence.

Nabors Industries Ltd., Transocean Ltd. and Callon Petroleum Co. are among the few energy companies whose debt is still trading at troubled levels that have not filed for bankruptcy, and may never do. The average yield of the Bloomberg Barclays High Yield Energy Index has fallen to 6.2% – by definition, no longer the high yield – since it hit 24% in March.

Representatives for Nabors, Transocean and Callon did not respond to a request for comment.

Industry watchers say this year’s energy distress boom is unlikely to repeat itself in 2021. In part, the wave of restructurings left fewer deadlines to stumble borrowers. Support may also come from vibrant credit markets and an expectation of economic activity picking up in the second half of the year, as more people get vaccinated. That said, the navigation will not be completely smooth.

“Next year’s pace won’t be the same as in 2020, but there will still be 11 Chapters,” said Becky Roof, Houston-based advisor at AlixPartners.

This is the second busiest year in energy restructuring since 2016 – the peak of the $ 100 oil spillover – with 107 producers, oilfield operators and midsize companies going bankrupt, according to data from the firm. attorneys Haynes & Boone.

Bankruptcy boom

The price of raw materials stabilized around $ 45 a barrel, after briefly dropping to negative prices in the spring, and natural gas prices rebounded. Energy companies have been buoyed by expectations that coronavirus vaccines will reach most of the population by the summer, leading to a return in demand for fuel.

But current prices are still not enough for most producers to survive in the long term, according to Spencer Cutter, analyst at Bloomberg Intelligence. He sees bankruptcies slowing down next year, but mostly as a hiatus before deadlines start to rise in 2022 and 2023, which could put some businesses back in trouble.

“The weaker ones were taken out of the herd,” Cutter said. “Most of the remaining companies may not make much or no money on oil at $ 45 and natural gas under $ 2.75, but they have the cash to cope for a while.”

See green

The fossil fuel industry faces the disgrace of many investors, who turn to more climate-friendly businesses, and a new U.S. government that could impose stricter regulations, according to Roof at AlixPartners.

“There is so much liquidity that was available in this market, and it is gone,” she said. “Any company that is considering traditional refinancing, there are just a lot fewer sources available now because it is an industry that is not in favor.”

Matthew Warren, restructuring partner at King & Spalding law firm, predicts further consolidation in the industry as some companies resort to bankruptcy to close deals.

Many borrowers have renegotiated their debt terms or resorted to bonds that pay interest in the form of additional bonds instead of cash to get through this year, Warren said. But with oil prices still too low to maintain them, time is running out in 2021.

“I don’t think a lot of energy companies have gone out of the woods, despite the stabilization of energy prices,” he said.

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