Number of Oklahoma energy companies filing for bankruptcy expected to rise in coming months
March 22--During the good years,
Cashion
-based oil-field manufacturer
Falcon Rigs Inc. had a staff of more than 120 workers in this small
Logan County
town, but these days the drilling rig maker gets by with a skeleton crew of 12.
With oil prices at less than $40 a barrel, there is little demand for new drilling rigs these days, said Levi Gililland, Falcon vice president.
In 2007, Falcon could sell a new drilling rig for $900,000, but these days a driller can purchase one at an oil-field auction for as little as a third of that price.
"There came a time when people didn't have the money to spend for new equipment, and when they can go to an auction and get it for cheaper, it has really hurt us a lot," he said.
Falcon Rigs filed for Chapter 11 reorganization in April, one of several
Oklahoma
energy-related companies to seek bankruptcy protection during the past year.
After six straight years of decline, business bankruptcy filings in
Oklahoma
were up slightly in 2015 from the previous year, about a 1.7 percent increase, according to an analysis of
U.S. Bankruptcy Court data. The total number of bankruptcy filings in
Oklahoma
was down 8.9 percent in 2015 from the previous year. Non-business bankruptcy filings, primarily personal bankruptcies, declined 9.1 percent in 2015 over the previous year.
The prolonged depression in oil and gas prices is a big reason for the increase in business bankruptcy filings in the state.
William Hoch, an attorney for the
Oklahoma City
law firm Crowe & Dunlevy and chair of the firm's Bankruptcy & Creditor's
Rights Practice Group, said an uptick in bankruptcy filings has meant a lot more travel for the firm's attorneys to
New York
and
Delaware
, where many companies file for bankruptcy.
"We are starting to see a lot more oil and gas companies file and related service companies, and I think this will increase for the foreseeable future," Hoch said.
Exploration and production companies have seen their ability to borrow money reduced as the price of oil has decreased because they borrow based on the value of their reserves, Hoch said.
Oil-field service companies have been affected by the downturn for different reasons.
"The service companies are not as much affected by the price of oil but that there is less demand for their services than there was a year ago, fewer wells are being drilled," Hoch said.
Several energy sector companies already have filed for bankruptcy in
Oklahoma
during the past 12 months.
Oklahoma City
-based driller
New Source Energy Partners and an affiliate filed for Chapter 7 bankruptcy liquidation on Tuesday after a yearlong lawsuit with an investor.
New Source said it has $5.1 million in cash and property, but owes creditors more than $51.2 million.
San Diego
-based
Osage Exploration Development Inc., which has offices in
Oklahoma City
and operates oil and natural gas wells in
Logan County
, filed for Chapter 11 bankruptcy protection in February, citing low oil prices that have put a strain on its cash flow.
Tulsa
-based
Sampson Resources Corp. filed for Chapter 11 in September in hopes of shedding more than
$3.25 billion in debt.
Many energy industry and bankruptcy court observers anticipate an even bigger number of oil and gas related companies to file for bankruptcy in the coming months.
The advisory and consulting firm Deloitte predicted in a recent report that as many as a third of 175 exploration and production companies worldwide are at risk for filing for bankruptcy, representing an estimated $150 billion in debt.
"The probability of these companies slipping into bankruptcy is high in 2016, unless oil prices recover sharply, a large part of their debt is converted into equity, or big investors infuse liquidity into these companies," the report stated.
Exploration and production companies have seen their ability to borrow money reduced significantly.
With the decline in oil and natural gas prices over the past year, the ability of producers to borrow money against their reserves is about to be significantly decreased by an average of more than 30 percent, according to an industry survey conducted by the national law firm Haynes and Boone LLP survey.
At the same time, companies have to continue to drill and maintain their leases in many cases, said Ian Peck, chair of Hayes & Boone's Bankruptcy and Business Restructuring section.
"Exploration and production companies have already reduced their capital expenditures, but there is a basic level of expenditures that they have to maintain to continue to operate," Peck said.
Haynes and Boone has tracked 51 North American oil and gas producers that have
filed for bankruptcy since the beginning of 2015, representing $17.39 billion in cumulative secured and unsecured debt.
Bankruptcies filed in
Texas
courts make up the vast majority of those bankruptcy cases, with 25 bankruptcy filings to
Oklahoma's
one --
Osage Exploration and Development. The numbers do not include
Oklahoma
companies that have filed for bankruptcy in other states, such as
Delaware
, where many companies are domiciled.
As of March 7, nine oil and gas producers have filed bankruptcy in
the United States
and
Canada
in 2016, according to
Haynes & Boone's Oil Patch Bankruptcy Monitor.
Most energy sector companies that file for chapter 11 bankruptcy in the coming months have a good chance of avoiding conversion into a Chapter 7 liquidation case, Peck said.
It doesn't make sense to liquidate most assets when the energy market is so depressed, he said.
"It might be a good time to buy, but it's not a good time to sell," Peck said. "The liquidation value is so low, it might be better to hold on and wait for the market to turn."
Private equity and other investors may eventually step in and purchase assets or entire companies out of bankruptcy court once prices turn around a little, he said.
"The market has to reach more of an equilibrium for that to happen." Peck said.
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