Houston Chronicle – Bankruptcy attorneys and restructuring experts are quickly becoming the most popular people in the oil patch.
Energy companies are lining up to seek survival advice as oil prices linger around $20 per barrel and the coronavirus pandemic ravages the economy.
West Texas Intermediate, the U.S. benchmark, settled at $20.34 per barrel Monday, nearly a 20-year low and well below the break-even point for companies in the U.S. shale industry. Amid the simultaneous supply and demand shocks, companies are bracing for the worst but before they take action, they are making phone calls.
Caused by a price war between Russia and Saudi Arabia and falling demand due to the coronavirus, the oil crash started about three weeks ahead of borrowing redetermination season — a busy period that kicks off April 1 and marks a time when companies review their credit agreements with lenders.
Matthew Cavenaugh, an attorney who specializes in restructuring work for energy companies at Houston office of the law firm Jackson Walker, has stayed busy in recent weeks fielding phone calls from shell-shocked clients facing meetings with banks and investors.
“They’re trying to determine if they need to update their presentations or throw them in the trash and start completely new ones,” Cavenaugh said.
Lenders, of course, hold the power but, Cavenaugh said, they could offer to postpone debt payments, waive loan defaults, change credit terms or, in some cases, extend more credit.
Ray Battaglia, an energy bankruptcy attorney based in San Antonio, has been receiving calls from clients with “what if” scenarios and seeking advice for approaching creditors. Companies with too much debt face the most risk, Battaglia said.
“There are high-risk companies and there are low-risk companies,” Battaglia said. “During times like these, it’s the healthy patient that will survive.”
For many in the industry, the oil price crisis brings back bad memories of the 2015 downturn and the 1986 crash, which resulted in more than 225,000 layoffs and plunged Texas into recession.
MAACO Restructuring Group founder Drew McManigle said his family lost its Midland-based oil-field services company during the early 1980s oil bust when work evaporated. He now advises companies about how to survive difficult periods or how to wind down a company and get the most value when liquidating assets.
“This is going to clean off the table again, just like it did in the late 1980s,” McManigle said.
As part of the work he describes as “showing the mouse how to get out of the mouse trap,” McManigle said he recommends that clients take a hard look at their assets, customers base and production before developing a strategy. Companies with cash, he said, will be able to buy assets at low prices from those that are distressed.
“Banks and private equity firms will be looking for any type of exit,” McManigle said. “To survive in this, you’re going to need big balance sheets and strong financing.”
Rob Albergotti, with the Houston office for the restructuring firm AlixPartners, said he and others have been fielding calls from energy industry clients and other companies asking about setting up furloughs, complying with local and state shutdown orders, liability issues and maintaining liquidity.
One tip the firm offers to clients with large enough credit agreements is to draw some of the funds and keep them as cash on their books.
“Having cash on your balance sheet is critical when navigating in uncertain waters and uncertain times,” Albergotti said.
That’s advice many companies have failed to heed. Some 432 energy companies saddled with more than $209.3 billion of debt filed for bankruptcy from 2015 to 2019, according to figures from the law firm Haynes and Boone. The firm reported a “significant uptick” of inquiries from clients since oil prices crashed in early March.
“Some oil and gas companies were over-leveraged and struggling before the recent downturn, while others were relatively healthy,” Haynes and Boone’s Jeff Nichols said. “Some are hedged at higher oil prices for the next year or so, some are more exposed. All producers, large and small, are having to adapt to this new environment and make contingency plans for a lengthy downturn. A consistent theme is the need to conserve cash and cut costs.”
John Castellano, an energy industry restructuring specialist with the Chicago office of AlixPartners, advises companies considering filing for bankruptcy to negotiate with their creditors as much as possible and if possible, file a time-saving prepackaged plan.
Castellano was part of a team with AlixPartners that helped Houston oilfield services company McDermott International file a pre-packed Chapter 11 bankruptcy plan in January. U.S. Bankruptcy Judge David Jones accepted the company’s reorganization plan less than two months after the case was filed. Castellano went on to serve as McDermott’s chief transformation officer,
“It’s a better way to use Chapter 11,” Castellano said. “It’s a more efficient way to use Chapter 11 but you have to do a significant amount of work beforehand.”