The oil and gas sector is currently enjoying a mini-boom cycle as economies gradually re-open and oil demand begins to return to a semblance of normalcy. The oil markets are in an upbeat mood once again, with oil futures trading sharply higher on Wednesday after the U.S. government reported a third-weekly drop in weekly inventories while the International Energy Agency (IEA) issued a bullish oil report for 2021. After declining 8.7 mb/d last year, the IEA now expects world oil demand to expand by 5.7 mb/d in 2021 to 96.7 mb/d.
For many U.S. shale producers, however, there’s still little to cheer about, with record numbers filing for Chapter 11 bankruptcy protection.
According to Energy and restructuring law firm Haynes and Boone, bankruptcies by North American oil producers climbed to the highest first-quarter level since 2016 as energy firms continue to struggle to recover from the carnage of the oil price crash in 2020.
Haynes and Boone has reported there were eight bankruptcies by North American oil and gas producers in Q1 2021, the second-highest figure for a first-quarter ever since 17 were reported for Q1 2016, the last time U.S. crude futures dipped under $30 a barrel over the past decade.
Crude prices have bounced back from year-ago lows, with WTI trading around $63 a barrel on Friday while Brent is changing hands at $67 a barrel.
Small firms in trouble
The big difference this time around is that smaller producers appear to be the main victims, with just $1.8 billion in aggregate debt for the quarter, the second-lowest Q1 total after $1.6 billion in Q1 2019.
For some perspective, consider that last year, U.S. energy companies that filed for bankruptcy held $53 billion in aggregate debt, the second-highest total since 2016 when debt totaled $56.8 billion.
As expected, Texas continues to be well represented, with half of the bankruptcy filers coming from that region.
HighPoint Resources Corp. (NYSE:HPR) was the largest debt-holder to file, with $905 million in secured and unsecured debt.
Apart from oil and gas producers, a total of five oilfield service companies also filed for bankruptcy, with offshore driller Seadrill Ltd (OTCQX:SDRL) accountING for most of the sector’s $7.2 billion debt.
Inflection point
Luckily, many producers and oilfield services companies have reached an inflection point, with the energy demand outlook considerably improved from just a few months ago.
Last week, the IEA issued a bullish oil report for 2021 whereby it revised up global oil demand in 2021 by 230,000 b/d to 96.7 mb/d, good for a 5.7 mb/d increase from 2020 levels. The energy watchdog has based the upgrade on encouraging economic indicators though it says recovery remains fragile due to surging Covid-19 cases in key consumer regions.
For instance, in its April update of the World Economic Outlook, the IMF raised its forecast for global GDP growth for 2021 and 2022 to +6% and +4.4%, respectively.
The United States received the biggest upgrade thanks to its swift vaccine rollout and hefty stimulus packages. The United States has so far unveiled the world’s fastest vaccine rollout as per Bloomberg, placing itself in a good position for a full re-opening of the economy. The latest vaccination rate stands at 3,053,566 doses per day, meaning it could cover 75% of the population, or the so-called herd immunity number, in just three months.
The IEA says the biggest demand growth will come in the latter half of the current year with strong demand growth requiring an additional 2 mb/d of extra crude to keep the markets well supplied.
Meanwhile, J.P. Morgan has estimated that Permian’s Delaware Basin oil drillers now require oil prices of just ~$33/bbl to break even down from $40/bbl in 2019. JPM says most U.S. onshore operators are economic at current oil prices, and many operators are even likely to ramp up activity in H2 and build solid momentum for higher volumes in 2022.
Hopefully, those Chapter 11 filings will quickly tail off from here.