Bankruptcies abound in America’s oilpatch. So far this year 40 oil exploration and production companies have gone under, according to analysis from lawfirm Haynes & Boone, involving $54 billion in debt. The biggest failure so far, with $11.8 billion in debt remains Chesapeake Energy CHK +1.6%.

As oil bankruptcies surge, vulture investors start their long feast- oil and gas 360

Source: Forbes

More Chapter 11s are coming, says corporate restructuring attorney Ken Coleman at Allen & Overy, and “that’s a good thing,” he says, because it will mean that management teams are finally accepting of the new reality of oil prices stuck at $40/bbl amid a continuing supply glut and pandemic-weakened demand. The world has changed, the debt-fueled fracking binge has come to an end. Many zombie oil companies cannot survive in their current form. “They have to rationalize the balance sheet, convert debt to equity, and sort out the right capital structure,” says Coleman. “That’s what the Chapter 11 system is for.”

No one in their right minds should want to invest new money into oil right now, right?. Demand is weak because of the pandemic, and analyst after analyst warns of global peak oil demand coming right around the corner. America’s output has fallen from 13 million bpd pre-Covid-19, to about 11 million bpd now, as drillers mothballed their rigs and laid off some 200,000 workers. There’s even pain at the safest of credits: ExxonMobil XOM +0.1% has announced its deep layoffs, lost half its value in the past year, and slumped behind Chevron in stockmarket capitalization. Both have now been overtaken in market cap by America’s new energy behemoth — the renewable energy giant NextEra Energy NEE -0.6%.

For contrarians, such abounding pessimism is a natural buy signal. Today’s emerging oil vultures can afford to be picky, and creative in their financings. What matters above all, says activist investor Ben Dell, founder and managing director of private equity fund Kimmeridge Energy, is asset quality. “There’s no point in taking a company through bankruptcy if you’re going to own a low-quality asset,” Dell says. Kimmeridge this month agreed to invest $440 million of new capital into Callon Petroleum (NYSE:CPE), which produces about 100,000 bpd from fields in the Permian and Eagle Ford regions. The Kimmeridge cash will go toward paying down some of Callon’s $3.35 billion in debt and pushing out maturities. In return, Kimmeridge receives $300 million in second-lien secured notes (paying 9%, maturing 2025), plus warrants to buy 15% of Callon’s outstanding shares. Kimmeridge also gets a 2% overriding royalty interest in all of Callon’s oil and gas output. If Callon averages 100,000 bpd for a year, Kimmeridge would get the equivalent of 730,00 barrels, worth about $23 million a year at current prices.

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