Shale boom belies oil patch pain amid Weatherford bankruptcy

By David Wethe on 5/15/2019

(Bloomberg) -- Oil prices are back up again and the U.S. has become the world’s largest producer and only three years on from a slump in the market. Yet the pain continues for some companies.



The boom in American shale output risks masking ongoing woes at a number of lower-tier explorers, as well as some oilfield servicers. Energy-related bankruptcies this year are trailing only those in the discretionary consumer goods sector, according to Bloomberg data. And some companies are warning of more stress ahead.



Weatherford International Plc, once one of the top providers of oil-well drilling and completion, last week said it was preparing to file for bankruptcy. Shale explorers Halcon Resources Corp. and Alta Mesa Resources Inc. have raised doubts about their ability to stay afloat. Bonds of producer California Resources Corp. are trading at yields of more than 10 percentage points above benchmark U.S. Treasuries, meeting a common definition of distressed debt.



These ailing companies reveal the flip side of the boom. High-cost producers with poor balance sheets are not getting much love from investors who are more focused on demanding returns than pouring more money into shale’s expansion, whether through debt or equity. And as producers rein in spending, the less-efficient service providers are struggling.



"There hasn’t been the institutional stomach, either at the debt level or the equity level, to go through the open-heart surgery that involves a bankruptcy," Patrick Hughes, a partner at law firm Haynes and Boone LLP, said in a phone interview. "It takes a long time for the boards of these companies to really realize this may be the only way they can clean up the balance sheet."



Weatherford said in a response to questions on Tuesday that it’s undergoing a “balance sheet” restructuring to address the company’s debt burden, and that this is “not a restructuring of operations, nor is it a declaration of bankruptcy.”



Halcon and California Resources didn’t immediately reply to requests for comment. Alta Mesa declined to comment.



Crude’s 40% rebound since late December -- to about $60/bbl in the U.S. and $70 elsewhere in the world -- wasn’t enough to prevent debt-burdened Bristow Group Inc. and PHI Inc., providers of helicopter services to offshore explorers, as well as producers Jones Energy Inc. and Rex Energy Corp., from filing for bankruptcy this year.



And making it tougher for the service providers are exploration customers who continue to hold the line on spending, with U.S. outlays expected to be down about 10% from last year, according to JPMorgan Chase & Co.



"A lot of people see the $60 or $70 and assume everything is great," Spencer Cutter, an analyst at Bloomberg Intelligence, said in a phone interview. "I think 2019 is going to be a bigger year for bankruptcies than 2018."



The casualties from the downturn peaked in 2016, when 142 companies filed with $70.3 billion in debt, according to Haynes and Boone. That number shrunk by more than half to 41 companies filing with $17.2 billion in debt in 2018.



This year, a Weatherford bankruptcy alone would add about $8 billion of debt to the tally. It would be the biggest wreckage in the industry in four years. In the case of Halcon, going under would be a repeat of a previous bankruptcy. Halcon’s 6.75% bonds maturing in 2025 are trading at less than half their face value and are rated CC by S&P Global Ratings, a level that signals the company will likely fail to meet some of its obligations.

What Bloomberg Intelligence says



Weatherford signed a restructuring agreement with holders of about 62% of its senior unsecured notes to facilitate a pre-packaged bankruptcy filing. The agreement calls for holders of $7.4 billion in senior unsecured debt to receive 99% of the common equity of the restructured company as well as up to $1.25 billion in new unsecured notes. With over $2.3 billion in holdings, Franklin Resources was by far the largest holder of the company’s unsecured debt at the end of March, according to Bloomberg data.-- Spencer Cutter and Leon Huang, industry analysts.



Meanwhile, equity issuance for U.S. energy companies in the first quarter fell to the lowest level this decade and bond sales dropped more than a third from a year earlier, according to industry consultant Drilling Info.



"Sixty-dollar oil is good if you’re a low-cost producer without a ton of debt in the Permian or maybe the Bakken or one of the better basins," BI’s Cutter said. "It’s ok if you’re a mid-tier, and it’s not so good if you’re third tier."





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