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US Shale Restructuring: E&P Executives Issue Dour Outlook as More Seek Bankruptcy Protection

The US shale sector continues to reel from low oil prices that were sparked by the COVID-19 pandemic and a Saudi-Russia price war back in March. More than three dozen onshore oil and gas producers have since filed for bankruptcy protection in US courts. The process will enable most to restructure their balance sheets and exit the court-supervised protection with a fraction of their previous debt load.

Operators in Texas, southern New Mexico, and North Louisiana are among those feeling the worst of the downturn and most say regional oil prices above $50/bbl will be needed to substantially increase drilling activity, according to a survey of upstream executives by the Federal Reserve Bank of Dallas.

The Dallas Fed’s energy survey was conducted in mid-September and is based on the responses of executives from more than 160 oil and gas firms in the US Eleventh District. The survey data showed 66% of respondents believe US oil production has peaked and 74% said OPEC’s ability to control prices has increased.

Looking forward, executives of exploration and production firms were queried on their goals over the next 6 months and the answers reflected a range of different priorities.

The two most common responses from the 108 executives that responded, combining for 35% of the answers, were to maintain production or grow production. Another 32% of respondents said reducing debt and finding new sources of capital were their priorities.

Suggesting that there is a minimal appetite for merger activity in the near future, only 12% said they are focused most on acquiring assets while 6% said they were most interested in divesting assets. Only 8% of executives that answered the survey said their top goal was to reduce costs.

Part of the survey includes soliciting comments from participating executives about the state of the business. Several of the comments reflected concerns over solvency and access to liquidity. One respondent described the situation within the shale sector as “survival of the fittest” and advised that “everyone in the industry needs to operate with an ‘owner’ mindset to survive, adapt, and evolve.”

Updates on North American Shale Sector Debt and Portfolio Restructuring

Oasis Petroleum filed for bankruptcy protection on 30 September after failing to meet loan obligations earlier in the month. The Permian Basin operator holds debt in excess of $2.75 billion and reports that at the end of the second quarter it had at least $77 million of cash and liquid assets. Bankruptcy filings show the company is seeking to shed $1.8 billion in outstanding debt and has secured a $450 million financing package to fund its exit from bankruptcy.

Lonestar Resources filed for bankruptcy protection on 1 October. The company operates in the Eagle Ford Shale of Texas where it produced around 14,000 B/D in June, according to company reports. The firm is seeking to restructure its debt load of more than $546 million.

After filing for bankruptcy protection in June, Sable Permian Resources said in court filings on 1 October that it has agreed to sell the company to its primary lender JPMorgan Chase. The transaction will eliminate $700 million in debt owed by the now defunct operator. Sable Permian was formed in 2019 after a merger between American Energy - Permian Basin LLC which was considered a last ditch effort between the firms to avoid bankruptcy.

Ultra Energy exited the bankruptcy process on 16 September and as part of its restructuring has renamed itself to UP Energy. The Delaware-incorporated operator of natural gas fields in Wyoming said it successfully eliminated $2 billion in debt and is preparing to generate free cash flow. UP Energy will have access to a reserves-based credit facility of $60 million in addition to a lending base of $100 million.

After signaling its intentions in August, FTS International officially filed for bankruptcy protection on 22 September. Two subsidiary companies are included in the filings. The shale sector service company’s restructuring package, which has a majority support from lenders, involves erasing $440 million in debt in exchange for most of its stock.

Chevron said on 5 October that it has completed its acquisition of Noble Energy. Valued at $5 billion, the transaction hands Chevron 92,000 acres in the Permian Basin along with the Leviathan field, the largest natural gas asset in the Eastern Mediterranean. The supermajor also netted fields in Equatorial Guinea and midstream assets in different parts of the US.

Occidental Petroleum (Oxy) announced on 1 October that it was selling its onshore oil and gas properties in Colombia to private equity firm Carlyle Group for a total of $825 million. The deal includes a cash payment of $700 million while the remaining payment will depend on future production and commodity price targets. The divesture is part of Oxy’s broader debt-reduction plan that was initiated to deleverage the company’s balance sheet after its acquisition of rival shale producer Anadarko Petroleum in 2019.

Devon Energy, only days after announcing a major merger, said on 2 October it sold off its legacy assets in the Barnett Shale of Texas to Banpu Kalinin Ventures (BKV) for a cash sum of $570 million. The deal includes a commodity-price-based provision that could net Devon an additional $260 million in payments over the next 4 years. BKV owns interest in more than 4,500 wells in Texas and Pennsylvania and is financially tied to Thailand’s energy conglomerate Banpu Public Company.

Earlier in September, Oman’s Ministry of Energy and Minerals inked a deal with the shale producer EOG Resources that will diversify that company’s holdings with a license to a 18,556-km2 block in Oman’s southwest empty quarter. According to various media reports, EOG plans to drill two horizontal oil wells there by 2022.

US Shale Restructuring: E&P Executives Issue Dour Outlook as More Seek Bankruptcy Protection

05 October 2020

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