Gauging the pressure: The state of distressed debt and bankruptcies in US oil & gas 1

Opportune's Ryan Bouley speaks with Debtwire...

Debtwire: The pace of Chapter 11 filings by US oil & gas companies has slowed since the start of 2016. But do you think another wave of bankruptcies could be looming? If so, what could be the catalyst, besides a sudden drop in energy prices?

R. Bouley, Opportune: We’ve already seen quite a few bankruptcy filings by oil and gas firms – there have been more than 100 filings across the industry since the start of 2015. Since this cycle started, a lot of the low-hanging fruit has been picked off, meaning companies that had high cost structures, excessive leverage, and just couldn’t make money in an environment where oil costs less than US$50 a barrel. Those guys have all gone through, or are in the process of going through, some kind of a bankruptcy, or they were able to rightsize their capital structures by exchanging some portion of their debt for equity or reducing coupon payments through debt-for-debt exchanges.

But there are certainly others out there that are at risk of bankruptcy. I think the main catalyst would just be an inability to either raise or generate cash. With that in mind, I think it’s important to remember what happened last year when we saw the price of oil go up to around US$60. When that period came along in the summer, you saw a bunch of second-lien financings get done. The market saw US$60, thought there was a recovery, and all kinds of investors jumped on the bandwagon. They thought, “Okay, here’s a recovery and an opportunity to get a secured piece of paper that has a coupon in the 7-11% range. Maybe it’s issued at a bit of an OID [original issue discount], so it’s yielding even higher, and now we’re going to catch the knife and ride this thing all the way up. And even if we don’t, we’ll be the fulcrum in a reorganization.” But that didn’t work out as planned for below for the full article.

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