Bankruptcies in 2015 rose sharply triggered principally by plummeting oil and gas prices. Half of those filing for bankruptcy were in the energy sector. That number is expected to double in 2016, experts say. In fact, half of current U.S. shale producers could file for bankruptcy over the next two years, said Fadel Ghent, a senior oil and gas analyst at Oppenheimer & Co., a leading national investment company.
The bankruptcy court for the Western District of Texas, which includes Austin, San Antonio, El Paso and Midland, experienced the highest increase in Chapter 11 bankruptcy filings, a jump of 65 percent from 2014 to 2015.
Bankruptcy filings in the Southern District of Texas, which includes Corpus Christi and Houston, increased by 37 percent from the prior year. The Eastern District of Texas saw a similar rise.
Oil and natural gas bankruptcies jumped from 14 companies in 2014 to 67 companies in 2015, according to Matt Egan at CNNMoney, marking the beginning of what is expected to become a growing trend in the next year.
Oil prices, which were over $100 per barrel in mid-2014, dropped to about $30 a barrel at the end of February. Gas prices are near 14-year lows, averaging $1.76 a gallon nationwide for gasoline. Coastal Bend prices have dipped as low as $1.36 per gallon in recent weeks.
The reduction in fossil fuel prices has led to sharply reduced revenues for oil and gas producers, which have reacted to the precipitous drop in commodity prices by slashing operating costs, reducing the number of employees and relying on cash reserves.
According to financial experts, drastic cost-cutting measures might have reached the limit, leaving these companies’ cash reserves exhausted and their debt levels at unstable levels. Additionally, given the current malaise in the oil and gas sector, capital markets and lenders are no longer accessible as possible funding sources.
Approximately one-third of the oil and gas companies in the U.S. are at distressed levels, according to experts, which means they are at risk for defaulting on their obligations and having to seek recourse to the bankruptcy laws for protection against their creditors as they reorganize their operations.
The only event that could turn the situation around — a sudden rebound in oil prices —is highly unlikely, experts predict. Most commodity analysts do not foresee a rise or stabilization in oil and gas prices until 2017.
Although exploration and production service companies involved in shale plays are the lead actors in bankruptcy spikes, the financial stresses are expected to be passed down into midstream companies such as gathering, pipeline and processing companies along with other, smaller service companies that focus on the oil patch.
Moreover, as in prior downturns in the oil and gas market such as in 2008, the financial distress is expected to creep into other business sectors such as commercial real estate, especially in the larger cities such as Houston, where so much commercial space is leased by oil and gas companies.
In large cities, law firms that specialize in bankruptcy restructuring and reorganization have been actively recruiting lawyers as they beef up their manpower in anticipation of the increased demand for their services.
Andrew Greenwell is a lawyer with a civil trial and appellate practice with a focus on commercial litigation. He was listed as a Super Lawyer in 2011-12 and 2014-15 and a Best Lawyer since 2005.