Tough Times for Energy Bankruptcy Lawyers

According to the national law firm Haynes Boone’s recent Oil Patch Bankruptcy Monitor report, June 30, 2021:

• Only twelve producers filed in Q1‐Q2 2021, which is the lowest Q1‐Q2 total since 2015 when 13 producers filed
• The aggregate debt for producers that filed in Q1‐Q2 2021 is just over $1.8 billion, which is the lowest Q1‐Q2 total, after $3.6 billion in Q1‐Q2 2015
• There were no producers with billion‐dollar bankruptcies in Q2 2021, which has not happened since Q3 2018
• Texas accounted for 58% of the total producer filings in Q1‐Q2 2021, with seven in total

For reference, Haynes and Boone, LLP has monitored North American oil and gas producer Chapter 11 bankruptcies since 2015. Over the past six years, there have been 266 oil and gas producer bankruptcies. In the same period, 306 oilfield services and midstream companies have filed for bankruptcy, bringing the combined North American industry total to 572.

The key driver for this decrease? Increased prices for oil and natural gas. In the graphic above, taken from Haynes Boone’s report, I have overlain the historic spot prices of WTI for the same period.

E&P Company Commitments

According to Moody’s Investor Services, an analysis of 55 North American E&P firms shows total capital spending not increasing in 2021, and production growing by just 3%.¹

Moody’s goes on to say that exploration and production (E&P) companies’ capital spending will remain roughly flat in 2021 as they seek to:

• Reduce debt
• Improve free cash flow
• Restore shareholder returns

It kind of reminds me of that old bumper sticker that said ‘Lord, Grant Me One More Oil Boom and I Promise Not to Mess This One Up.’ If these various initiatives prove successful, however, energy bankruptcy lawyers may need to develop some alternative industry expertise.

WTI Strip Prices Increase

Over the last month, near-term futures prices for the WTI contract increased by approximately $2.00 per barrel.

Oil Strip Prices - One Month Change

However, the oil price curve remains in "backwardation," reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on September 7, 2021, as well as the predicted crude oil prices based on options and futures markets. Blue lines are within one standard deviation (σ) of the mean, red lines are within two standard deviations.

WTI Crude Oil $/BBL

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $56.50 and $79.50 per barrel in mid-December 2021. Likewise, there is roughly a 95% chance that prices will be between $42.00 and $101.00. By mid-February 2022, the one standard deviation (1σ) price range is $53.50 to $82.50 per barrel, and the two-standard deviation (2σ) range is $35.50 to $110.00 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. If someone asks you longingly if oil will be at $80 per barrel again soon, you now can respond that markets indicate there is about a 15% probability that oil prices are expected to get there by this December.

1. Moody’s Research Announcement: Moody's: E&P companies’ continued capital discipline to keep production volumes flat in 2021, New York, April 14, 2021