The U.S. energy sector is in a free fall. Oil and gas, oil field service, midstream, and manufacturing companies with significant exposure to the sector are scrambling to restructure billions of dollars of debt as demand wanes and prices collapse. We expect to see a wave of Chapter 11 filings of companies that narrowly avoided formal restructurings in the past 4 years. We also expect a series of “Chapter 22’s” where former lenders restructured into equity, with still heavily levered balance sheets that are not sustainable in the current paradigm. The capital markets, with respect to upstream and service companies, are still a barren landscape and getting bleaker. This year is developing into another spate of bankruptcies across an industry still reeling from over 40 mid-cap bankruptcies in 2019.
Lenders are now in a precarious situation as unsecured debt, that absorbed most of the losses in restructurings over the past several years, has been converted to equity or written off. With the disappearance of this cushion of junior debt, senior debt exposure has now exponentially increased, threatening to impair billions in collateralized obligations.
While the large banks have significant exposure to the U.S. energy sector, many regional banks are perilously exposed. There are multiple regional banks that now have over 6% of their lending portfolios exposed directly to the energy sector, with some banks having over 10% of their total lending portfolios tied to oil and gas companies. Moody’s Investor Services reported earlier this year that North American oil and gas companies have more than $200 billion of debt maturing over the next four years, with more than $40 billion maturing in 2020. Moody’s also reported recently that U.S. oilfield services companies face a $32 billion wave of debt coming due this year through 2024.
Our energy sector experts see a plethora of mid-cap oil and gas and services companies resorting to restructurings, but with the macro economic downturn as a result of COVID-19 driving decreased demand, and escalating production wars between Saudi Arabia and Russia, the path of restructurings is uncertain. Former “easy” paths like mergers and asset sales are increasingly more difficult as there is no capital market support. Cash is precious inside upstream and service companies as pressure on services pricing and wage deflation/layoffs came in a crushing wave over the last few weeks. Several in-process bankruptcies that were headed towards sales have derailed as a result of a lack of capital market support.
Banks and other lending institutions must be proactive in accurately assessing the value of oil and gas assets underpinning outstanding credits and determine impairments, in addition to developing risk mitigation plans to cope with a beleaguered industry through what appears to be an extended period of uncertainty and extreme volatility.
Our Transaction Advisory Services and Turnaround & Restructuring professionals offer relevant professional services to the banking and oil and gas sectors, including:
- Valuation of underlying collateral – for energy credits this may include valuing oil and gas assets (proved developed producing/non-producing and proved undeveloped reserves) as well as enterprise valuation
- Credit exposure risk assessment and loan file reviews
- Cash flow and budgeting analysis of debtors
- Goodwill and asset impairment testing
- Commodity risk management and hedging effectiveness
- Turnaround and restructuring services (creditor and debtor advisory)
- Transaction advice and assistance
- Fairness opinions
© Copyright 2020. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.