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"Tidal Wave" Of Energy Bankruptcies? Just A Gentle Wave

Sep. 25, 2020 10:27 AM ET3 Comments
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Long/Short Equity, Contrarian, Medium-Term Horizon, Oil & Gas

Seeking Alpha Analyst Since 2014

Author of Energy Investing Authority

Top 1% Analyst According to TipRanks

I have a decade of experience in both the investment advisory and investment banking spaces, with stints in portfolio management, residential mortgage-backed securities, derivatives, and internal audit at various firms. Today, I am a full-time investor and "independent analyst for hire" here on Seeking Alpha.


Six months ago, the world was ending. Panic was at an all-time high, but perhaps in no sector more so than energy. Analytics firms like Rystad Energy were busy counting up the debt obligations of distressed or potentially distressed companies, foreseeing potentially hundreds of bankruptcies in 2020 and 2021, a so-called "tidal wave". North of $250B in debt was presumed to be at risk, what could amount to be a tidal wave of losses for both credit and equity investors.

Certainly some producers did fold. Chesapeake Energy, Whiting Petroleum, Denbury Resources, Ultra Petroleum, Llilis Energy, Chaparral Energy, and scores of others have sought relief in the courts; others still have looked for out of court methods to rid themselves of financial leverage (e.g., through debt exchanges). It seems like every other day another bankruptcy filing is announced.

However, it has not been as bad as once feared, with the outlook (dare I say) more than a bit rosier than once speculated. In fact, if stars align and companies do a little better than I predict, we might see less energy bankruptcies this year compared to 2019:

The potential delta into year end largely comes down to borrowing base redeterminations, many of which are slated to take place in the fall. Will banks continue to play ball, comfortable enough in their senior lending positions versus unsecured lenders? Or will they finally have enough with lofty valuations on acreage given the poor trends in asset sale pricing and force restructuring? That is up in the air.

There are myriad other factors in play as well, and sentiment is certainly poor. A recent senior executive, in anonymous commentary to a Federal Reserve of Dallas questionnaire, phrased it pretty well:

What more could possibly go wrong? We should stop asking, for something else seems to pop up when we do.

With great risk comes great opportunity however. This is yet another shakeout phase for shale. Some firms will restructure, others will close permanently. Costs will be taken in, and breakevens will trend lower than they did several years ago. Several in the industry - for once - looks poised to generate free cash flow. While much of that cash will go to debt owners to reduce leverage, several E&Ps look to be paying out sustainable dividends in a high $30s/low $40s WTI environment.

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Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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