On April 20, 2020, U.S. benchmark crude traded negative for the first time. This drastic drop in price was caused by the perfect storm of the Saudi Arabia-Russia price war and the novel Coronavirus. The pandemic has halted demand for gasoline, jet fuel and diesel; bringing to a standstill the world’s consumption of tens of millions of barrels of oil every day. Thus, simultaneously with the decrease in price, the decrease in demand on account of the pandemic increased the global supply of oil. These two events have driven the oil and gas industry into economic crisis. On April 1, 2020, Whiting Petroleum became the first major shale bankruptcy filed in the current crisis. On April 26, 2020, Diamond Offshore Drilling became that second major victim of the oil market crash thus far, and more are expected to follow. Here are the trends to watch and events to take note of as the energy industry turns to restructuring advisors to address the current crisis:
1. Reduced Demand/Oversupply of Oil: According to Reuters, fuel demand has declined approximately 30% worldwide—producing a glut of oil. This has left energy providers with millions of barrels in storage.
2. Crude Futures Turned Negative: West Texas Intermediate crude futures turned negative for the first time in history.
3. Refineries Slowed Down: In the week of April 17, oil refiners in the United States processed the lowest amount in thirty years. Refineries are running at half rate across Europe and Asia.
4. Reduced Production: On April 12th, oil-producing nations agreed to cut approximately ten percent of the world’s output of oil—the largest production cut ever negotiated. Production cuts have continued in the United States with only 60% of oil rigs in operation.
5. Shale Producers Are Especially in Trouble: Already laden with heavy debt levels and operating costs that cannot be easily reduced, these producers are particularly susceptible due to narrow margins.
6. The Domino Effect: Service providers are at risk as demand for their services plummets in the face of decreased capital expenditures by upstream companies. In addition to Diamond Offshore Drilling, as noted above, Speedcast International Limited, a satellite-communications company, filed for bankruptcy on April 23rd in the Southern District of Texas. Speedcast connects oil rigs to internet and phone. Additionally, Diamondback Industries Inc., a manufacturer and seller of disposable setting tools, power charges, and igniters used in the completion of oil and gas wells, filed for bankruptcy in the Northern District of Texas on April 21st.
7. We Are Still in a Holding Pattern: Lenders and bondholders in many distressed credits are delaying restructurings, sale processes or bankruptcies given the market situation and a lack of desire to own these distressed oil assets. However, liquidity pressures will continue to mount, and lenders and bondholders will ultimately be reluctant to fund further new money in the current environment.
8. Texas Courts Will Get Busier: The Northern and Southern Districts of Texas—a popular destination for energy bankruptcies are already seeing an increase in activity.
9. Strategic Mergers & Focused Asset Sales: Oil and gas M&A was nearly nonexistent in the first quarter of 2020. Still, the downturn may eventually push the market into healthy consolidation as buyers will have access to high-quality assets.
10. Coal Is Still in Trouble: With so much going on with oil, coal hasn’t been in the headlines. That doesn’t mean, however, that its troubles have gone away. Moody’s Investors Service wrote that it “expects a very challenging year for the coal industry in 2020.” The current economic downturn will likely only further accelerate the decline in demand in the coal industry.
