“Substantial” E&P Bankruptcies Likely Before Year End, Haynes and Boone Says

According to Haynes and Boone LLP, oil and natural gas market conditions heading into September are not moving in an optimistic direction for US industry, with continued presence of Covid-19 cases casting a veil on demand of energy.

In an updated report from the Oil Patch Bankruptcy Monitor released on Monday, the Dallas-based law firm said the pandemic continued to contribute to a “collective gloom” in which prices and industry activity would turn. not anytime soon.

Moreover, without any near-term hope of improving economic conditions for US exploration and production (E&P) companies, it is reasonable to expect that a “substantial” number will continue to seek protection. creditors before the end of this year.

Haynes and Boone has been monitoring E&P bankruptcies in North America since 2015.

“Until economic activity fully resumes and consumers have confidence that the worst of the pandemic is behind us, demand levels will remain depressed,” the authors said.

“Burnt” debt cushion

In July and August, around 13 E&P filed for bankruptcy, which, combined with other filings so far this year, is a 62% increase over the same period a year ago, according to Haynes. and Boone.

The law firm noted that the total guaranteed debt involved in producer bankruptcies from 2020 to date already exceeds the total amount of guaranteed debt for all E&P deposits in 2016. In 2016, producers had a level of unsecured debt much higher than what was reported in 2020, the firm said.

“As a direct result of this change, more secured lender receivables are written down this year than they were four years ago,” said Haynes and Boone. “This endangered ‘unsecured debt cushion’ that existed earlier in this cycle, including in 2016, and served as a heat shield to protect secured lenders, has been burned by continued pressure from low commodity prices. due to oversupply and declining demand. ”

Over the entire five-year period to August 31, 244 producers have filed for bankruptcy since the Oil Patch Bankruptcy Monitor began compiling E&P records. These have involved over $ 172 billion in global debt with over $ 50 billion to date in 2020.

Most of those bankruptcy filings took place in Texas, with around 118 filings. Delaware, with 37, and Colorado, with 12, round out the top three states in reported filings. Several states, including Nevada, New Mexico and West Virginia, have reported only one bankruptcy filing each in the past five years, according to the research.

Meanwhile, independent producer Lonestar Resources US Inc. has become one of the last E&P to reorganize under Chapter 11. The Fort Worth, Texas-based operator whose business is concentrated in Eagle Shale Ford plans to eliminate about $ 390 million in debt. Approximately $ 250 million of senior notes due 2023 would be converted to equity.

Lonestar expects to be able to meet its financial commitments and continue to operate as usual throughout the restructuring period.

“We have carefully considered our options in the unprecedented environment facing the energy industry and have concluded that a consensual restructuring is in the best interests of the company,” said CEO Frank D. Bracken III . “In combination with our efforts to significantly reduce our capital and operating costs, the significant reduction in leverage that this transaction will provide to the company will allow Lonestar to be very competitive going forward. ”

Latham & Watkins LLP, Hunton Andrews Kurth LLP, Intrepid Partners LLC, Rothschild & Co US Inc. and AlixPartners, LLP represent Lonestar.

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