Oil and gas bankruptcy hit a fever pitch in 2020; such companies have brought more than $87 billion to Houston’s bankruptcy court between the start of the year and Nov. 30.
That’s a larger debt total than in any year since before 2015, according to data from Haynes and Boone LLP. The H&B data only goes back to 2015.
The record bankruptcies came in a year fraught with trouble for oil and gas companies. The Covid-19 pandemic cut into demand for transportation fuels and manufacturing, which pushed the oil price down to record lows. That means many oil and gas producers had to pull back spending plans, leaving less work for the companies providing them with equipment and services to run their operations. The resulting downturn was almost certainly the deciding factor for many of the companies that ended up in bankruptcy court.
“There were plenty of companies that were living on the brink, that maybe could have scraped by under better oil prices,” said Andrew Dittmar, senior analyst for Enverus.
In-court oil and gas restructuring this year was primarily done via debt-for-equity agreements, in which companies turn over some or all of their ownership interests to creditors in exchange for debt forgiveness. That’s not a great outcome for the stockholders who owned the companies before bankruptcy, who more often than not end up with nothing.
But that does mean that companies that have been through bankruptcy are probably better positioned to operate in 2021 than their counterparts who manages to scrape by and barely avoid bankruptcy, Dittmar said.
Management teams that ran their companies well enough that they were able to come through this and avoid Chapter 11 probably didn’t come through unscathed,” Dittmar said.
Most of the companies that had their balance sheets cleaned up in court were mid-sized, which means they probably won’t be having an outsized impact on the M&A market as buyers, Dittmar said. But it’s entirely possible that some of these formerly-bankrupt companies go from being a toxic acquisition target to an attractive one because of the reduced debt loads, Dittmar said.