Back to top

Image: Bigstock

Energy Sector Update: Bankruptcies Beleaguer Shale Producers

Read MoreHide Full Article

Unsettled by a global health emergency, people around the world hope to see the curve being flattened. Concerted efforts are being made by a unified force in every sphere to eradicate the novel coronavirus pandemic from the face of the earth. However, this task seems daunting and time-consuming. In fact, no sector was spared of this rapidly-spreading deadly virus, especially the energy space.

The coronavirus chaos perturbed most energy players, especially the offshore drilling companies. As the drop in oil prices and the ramp-down of business activity due to the pandemic mess weakened demand for offshore drilling services, the relevant companies were left debt-laden without access to credit.

Of the seven largest offshore drillers, Diamond Offshore Drilling as well as three other companies, namely Noble Corporation (NE - Free Report) , Seadrill Limited and Valaris Plc either sought protection from creditors under the chapter 11 or already began debt-restructuring discussions to avoid insolvency. These companies tend to utilize the proceedings of reformation to streamline and boost their balance sheet positions, thereby attaining a more secure debt profile while continuing to concentrate on safe, reliable and efficient contract drilling services for their global clients.

Apart from the offshore drillers, the steep fall in oil prices caused several shale producers to go bankrupt. Not so long ago, the United States became the world’s largest oil producer, led by shale companies with production of about 13 million barrels per day (bpd). However, shale drilling usually suffers sharp decline rates, causing quick depletion of wells. Consequently, the operators are required to go on drilling new wells to compensate for the lost barrels of oil produced. This induced most shale producers to incur heavy debt to finance their operations.

Eventually, with the meltdown in oil prices, activity in the shale region became economically inviable, given the massive capital burns, depressed returns and huge debts. What followed was a string of bankruptcies.

Shale producer Oasis Petroleum is the latest to file for Chapter 11 bankruptcy protection after coronavirus-induced oil price crash dried up the available capital in the energy industry. The company filed for Chapter 11 with an intention to improve its financial position and significantly lower its debt.

Last month, another energy player Whiting Petroleum Corporation recovered from bankruptcy and its ownership was made available to the public on the New York Stock Exchange. Whiting Petroleum filed for chapter 11 bankruptcy on Apr 1, 2020 and finally overcame the crisis through a strenuous realigning process on Sep 1.  The entity was the first publicly traded shale producer to file for bankruptcy after the historic plunge in crude prices during March.

Some shale companies, such as Lonestar Resources, Chaparral Energy, Extraction Oil & Gas , Lilis Energy,  Ultra Petroleum and currently the Zacks Rank #3 (Hold) Chesapeake Energy were already struggling to make a profit even before the coronavirus had struck and therefore all filed for bankruptcy. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Is a Turnaround Near-Term Possibility?

Oil priced between $45 and $50 a barrel is considered the break-even point for most shale operators, which means that they need crude prices to be pegged at a minimum of $45 to balance their operating cash flows with capital expenditure. Even though U.S. oil price has been ticking up a little bit recently at the prevalent crude price of around $47 per barrel, a large number firms are unlikely to achieve cash flow at a breakeven. Considering the fact that COVID-19 is here to stay for a while along with its resultant economic turmoil, a stark rebound in the U.S. shale industry will be hard to achieve anytime soon.

Just Released: Zacks’ 7 Best Stocks for Today

Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.3% per year.

These 7 were selected because of their superior potential for immediate breakout.

See these time-sensitive tickers now >>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Noble Corporation (NE) - free report >>