With commodity pricing depressed and the coronavirus pandemic continuing to affect industry, many previously passive upstream creditor investors in oil and gas companies are finding their status suddenly changing.
During his 30-year career as a corporate accounting and restructuring professional in the energy industry, Gary Pittman, Managing Director at Opportune LLP, has been through a fair amount of industry up and downs. While the 2014-2016 downcycle wreaked havoc on balance sheets and caused many companies to file for bankruptcy and restructure debt due to market corrections from the shale boom, the most recent cycle is different in that it was mainly attributed to unforeseen events, such as a global pandemic coupled with an oversupplied crude market and lack of consumer demand for crude oil and refined products.
"2020 was a macro event that hit a much larger population of the companies, as this was demand-driven reductions and more of a shock to the system than the 2014-2016 periods,” Pittman says. “Unlike the 2014-2016 period, the market to sell was much weaker in 2020, and many lenders could not exit their positions."
Looking forward to 2021, Pittman expects lenders to push for a higher ratio of earnings before interest, taxes, depreciation and amortization (EBITDA)-to-debt to continue in the short-term. The good news for the industry?
“2021 is expected to be better than 2020. So, you would expect the bankruptcy activity will go back to historical levels and decrease from the 2020 levels.”
“2021 is expected to be better than 2020,” Pittman says. “So, you would expect the bankruptcy activity will go back to historical levels and decrease from the 2020 levels. However, I do not see the banks and lenders changing their strategies for restructuring in 2021.”
Meanwhile, the ongoing COVID-19 pandemic is likely to continue to impact the oil and gas industry in 2021, with E&P operators placing particular emphasis on health and safety measures for their workforce, according to Pittman.
“The main impact is on global demand, which is driving down prices,” Pittman says. “Additionally, it has put more strain on HS&E (Health Safety and Environment) within organizations to provide a safe working condition and address the inherent challenges with that.”
As we close out 2020 and head into 2021, what are the opportunities financially distressed E&Ps can look towards to help weather the current storm?
“The items I think that are going to be critical are liquidity, which would be the most important factor," Pittman says. "There will continue to be pressure reduction in the capital expenditure plans to the extent that anyone doesn’t lose their best acreage. And, I think the current environment will allow companies an opportunity to renegotiate midstream and other contracts that have renewals in 2022.”