Oil prices turned negative. Hundreds of US oil companies could go bankrupt

Apr 20, 2020, 3:40 PM
(File photo: A filler nozzle pumps fuel into the gas tank of a tractor trailer at a Phillips 66 gas...
(File photo: A filler nozzle pumps fuel into the gas tank of a tractor trailer at a Phillips 66 gas station in Princeton, Illinois, U.S., on Wednesday, April 1, 2020. Photographer: Daniel Acker/Bloomberg via Getty Images)
(File photo: A filler nozzle pumps fuel into the gas tank of a tractor trailer at a Phillips 66 gas station in Princeton, Illinois, U.S., on Wednesday, April 1, 2020. Photographer: Daniel Acker/Bloomberg via Getty Images)

(CNN) — The American oil industry is facing a doomsday scenario.

The coronavirus pandemic has caused oil demand to drop so rapidly that the world is running out of room to store barrels. At the same time, Russia and Saudi Arabia flooded the world with excess supply.

That double black swan has caused oil prices to collapse to levels that make it impossible for US shale oil companies to make money. US crude for May delivery turned negative on Monday — something that has never happened since NYMEX oil futures began trading in 1983. It was easily the oil market’s worst day on record.

US crude for June delivery is still trading above $20 a barrel — but even that’s disastrous.

“$30 is already quite bad, but once you get to $20 or even $10, it’s a complete nightmare,” said Artem Abramov, head of shale research at Rystad Energy.

Many oil companies took on too much debt during the good times. Some of them won’t be able to survive this historic downturn.

In a $20 oil environment, 533 US oil exploration and production companies will file for bankruptcy by the end of 2021, according to Rystad Energy. At $10, there would be more than 1,100 bankruptcies, Rystad estimates.

“At $10, almost every US E&P company that has debt will have to file Chapter 11 or consider strategic opportunities,” Abramov said.

OPEC cuts failed to end the panic

The most stunning part of the record low in oil prices is that it comes after Russia and Saudi Arabia agreed to end their epic price war after President Donald Trump intervened. OPEC+ agreed to cut oil production by a record amount.

Trump said the OPEC+ agreement would save countless jobs and much-needed stability to the oil patch.

“This will save hundreds of thousands of energy jobs in the United States,” Trump tweeted on April 12. “I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia.”

Yet crude has kept crashing, in part because those production cuts don’t kick in until May. And demand continues to vanish because jets, cars and factories are sidelined by the coronavirus pandemic.

The hope in the oil industry is that Monday’s negative prices are somewhat of a fluke caused by the rolling over futures contracts.

The record low in the May contract comes on very thin trading volume ahead of Tuesday’s expiration. That’s because there are concerns that there will be no room to store those barrels delivered in May. The June contract, however, only dropped around 10% to $22 a barrel. And Brent crude, the world benchmark, fell just 5% to $26.50 a barrel.

Still, oil contracts roll over each month and they don’t crash to record lows.

“There will be a lot of companies that don’t survive this downturn,” said Ryan Fitzmaurice, energy strategist at Rabobank. “This is one of the worst on record.”

‘Unprecedented’ stress in the oil industry

Signs of stress abound in the oil patch.

The S&P 500’s energy sector has lost more than 40% of its value this year — despite the dramatic rebound in the overall stock market over the past month.

Noble Energy, Halliburton, Marathon Oil and Occidental have all lost more than two-thirds of their value. Even Dow member ExxonMobil is down 38%.

Whiting Petroleum became the first domino to fall when the former shale star filed for Chapter 11 protection on April 2. But it certainly won’t be the last.

Rystad’s $20 scenario predicts more than $70 billion of oil company debt will get reorganized in bankruptcy, followed by $177 billion in 2021. And that only accounts for exploration and production companies, not the servicing industry that provides the tools and manpower to drillers.

The key will be how long oil prices stay dirt cheap. A rapid rebound in prices could allow many oil companies to avoid bankruptcy.

Buddy Clark, co-chair of the energy practice at Houston law firm Haynes and Boone, said his firm is “extremely busy” working on potential oil bankruptcies. Haynes and Boone has been forced to pull lawyers from other areas of the firm to work on the oil problem.

“I don’t think I’ve seen anything like it in my lifetime. It’s unprecedented,” said Clark, who started working in the industry in 1982.

Clark thinks that despite the further collapse in prices, there will still be only — “only” — 100 oil bankruptcies in 2020.

“It’s hard to believe that 100 bankruptcies is the optimistic view. That just shows you where we are,” Clark said.

Liquidations could be on the way

There would probably be more bankruptcies already if it weren’t for the extreme volatility in oil prices. Clark said companies are having trouble drawing up restructuring plans because they don’t know what the price of the commodity will be.

“Ironically, the lower price has slowed down the process,” Clark said. “A number of companies may have teed up filings but they need to go back to the drawing board.”

The dire outlook in the oil industry will make it very difficult for companies attempting to reorganize in Chapter 11 proceedings to get the required financing and support. Debtholders who would normally swap their debt for equity may not want that equity.

That means, unlike the 2014-2016 crash, some oil companies may not survive altogether.

“Chapter 11 requires financial sponsors to back you. You may see more Chapter 7 liquidations,” said Reid Morrison, US energy leader at PwC.

The nightmare scenario could present lucrative buying opportunities for the industry’s biggest players. That’s because struggling oil companies, either in bankruptcy or before it, will be forced to sell off prime acreage — at fire sale prices. Exxon and Chevron, the industry’s supermajors, could be tempted to make acquisitions.

“Those with strong balance sheets will be able to take advantage of the situation,” said Morrison.

However, he noted the supermajors will be “cautious about pulling the trigger” in the next six months because they must defend their coveted dividends first.

The next dominoes?

The oil crash has set off a guessing game about which companies will be next to succumb to bankruptcy. The most vulnerable companies are the ones that piled on too much debt, face looming debt maturities and can’t generate cash flow to even make their interest payments.

Rystad’s Abramov said “no one would be surprised” if Chesapeake Energy and Oasis Petroleum were forced to consider bankruptcy.

Chesapeake recently suspended dividend payments on preferred stock. Its stock price crashed so low that it turned to a one-for-200 reverse stock split to comply with exchange requirements.

Shale driller Oasis has lost more than 90% of its value this year. Its stock is trading below 30 cents.

Although American frackers rebounded from the 2014-2016 oil crash, there are concerns the shale industry could be permanently scarred.

Investors were already tired of the industry’s horrible returns following years of excessive spending and oversupply. And that was before the great oil crash of 2020.

™ & © 2020 Cable News Network, Inc., a WarnerMedia Company. All rights reserved.

We want to hear from you.

Have a story idea or tip? Send it to the KSL NewsRadio team here.

Today’s Top Stories


About 87% of Tuesday's US flight cancellations are Southwest, according to flight tracking website ...
Pete Muntean and Greg Wallace, CNN

US Transportation Dept. investigating Southwest holiday travel meltdown

The US Transportation Department said it is in the early stages of an investigation into the Southwest Airlines holiday travel meltdown in December.
1 day ago
School Shooting Newport News...
Aya Elamroussi, Chris Boyette, Dakin Andone and Michelle Watson, CNN

School board votes to cut ties with superintendent weeks after 6-year-old allegedly shot teacher

Administrators were warned that the child had a gun the day when a teacher was shot at the front door of Richneck Elementary School
1 day ago
Facebook-parent Meta said on Wednesday that it will restore former President Donald Trump's account...
Clare Duffy, CNN

Meta says it will restore Trump’s Facebook and Instagram accounts

It was not immediately clear whether Trump will return to the Meta platforms. Twitter restored Trump's account in November.
2 days ago
Earth core structure. Elements of this image furnished by NASA (Adobe stock)...
Lianne Kolirin, CNN

Earth’s inner core may have stopped turning and could go into reverse, study suggests

With a radius of almost 2,200 miles, Earth's core is about the size of Mars. It consists mostly of iron and nickel, and contains about about one-third of Earth's mass.
2 days ago
During a recent excursion to the icy plains of Antarctica, an international team of researchers dis...
Jackie Wattles, CNN

Rare 17-pound meteorite, one of the largest ever, discovered in Antarctica

The meteorite is about the size of a cantaloupe but weighs 17 pounds. It's one of about 100 that size discovered in Antarctica.
2 days ago
President Barack Obama (center) speaks as former Presidents Bill Clinton (left) and George W. Bush ...
Kevin Liptak, Jamie Gangel and Edward-Isaac Dovere, CNN

Clinton, Bush and Obama turned over all classified records, representatives say

The discovery of classified documents in former Vice President Mike Pence's Carmel, Indiana, home was the third such case in recent months.
2 days ago

Sponsored Articles

Kid holding a cisco fish at winterfest...
Bear Lake Convention and Visitors Bureau

Get Ready for Fun at the 2023 Bear Lake Monster Winterfest

The Bear Lake Monster Winterfest is an annual weekend event jam-packed full of fun activities the whole family can enjoy. This year the event will be held from January 27-29 at the Utah Bear Lake State Park Marina and Sunrise Resort and Event Center in Garden City, Utah. 
happy friends with sparklers at christmas dinner...

15 Easy Christmas Dinner Ideas

We’ve scoured the web for you and narrowed down a few of our favorite Christmas dinner ideas to make your planning easy. Choose from the dishes we’ve highlighted to plan your meal or start brainstorming your own meal plan a couple of weeks before to make sure you have time to shop and prepare.
Spicy Homemade Loaded Taters Tots...

5 Game Day Snacks for the Whole Family (with recipes!)

Try these game day snacks to make watching football at home with your family feel like a special occasion. 
Happy joyful smiling casual satisfied woman learning and communicates in sign language online using...

The Best Tools for Deaf and Hard-of-Hearing Workplace Success

Here are some of the best resources to make your workplace work better for Deaf and hard-of-hearing employees.
Team supporters celebrating at a tailgate party...

8 Delicious Tailgate Foods That Require Zero Prep Work

In a hurry? These 8 tailgate foods take zero prep work, so you can fuel up and get back to what matters most: getting hyped for your favorite
christmas decorations candles in glass jars with fir on a old wooden table...
Western Nut Company

12 Mason Jar Gift Ideas for the 12 Days of Christmas [with recipes!]

There are so many clever mason jar gift ideas to give something thoughtful to your neighbors or friends. Read our 12 ideas to make your own!
Oil prices turned negative. Hundreds of US oil companies could go bankrupt