Houston oil and gas companies are reporting billions in losses for the first quarter of 2020, and the next few months are not looking much better. As Texas oil continues to hover around $20-25 per barrel, companies are slashing budgets and cutting workers.
Houston-based Diamond Offshore Drilling has already filed for Chapter 11 bankruptcy amid the conoronavirus pandemic. And experts who watch the industry say more bankruptcies are on the way.
Charlie Beckham specializes in oil and gas bankruptcies at Haynes and Boone in Houston. He spoke with energy reporter Kyra Buckley about why companies are vulnerable during the oil price crash.
You can listen to the interview above. Here are some highlights, edited for length and clarity:
What are some of the things oil companies do to prevent being in the position to go bankrupt?
One way is to have no debt. Unfortunately for all of the companies that are in the industry, except for a very few, they all have some amount of debt for their continuing operations. It's a common aspect of the industry that an exploration and production company borrows money. I think many, many of the oil companies here in Houston and across the country have been caught with a decrease in the price for the oil that they sell compared to the amount of debt they’re carrying on their books.
The oil and gas industry was still recovering from the 2015 price crash. Does that mean some companies may be in more vulnerable situations?
The challenge for so many companies that were able to survive the downturn in the 2015 to 2017 era is that they didn’t eliminate all of the debt on their books. They kept what many consider to be a manageable amount of debt for purposes of operations. That was all premised on a belief that by 2019, 2020, commodity prices would return to a manageable level.
Some have said companies are in this situation also because of so-called cheap debt. Can you explain what they mean by that?
Where you saw a lot of the interest in the oil and gas industry over the last 10 years was from investors who flooded money into the only gas industry generally on a junior basis — meaning they loaned money to oil and gas companies at generally low interest rates with an expectation that there was such tremendous cash flow in the oil and gas industry that it would be easy for companies to repay those loans on a timely basis. That simply has not happened.
Instead, you’ve had what we’ve seen the last month of oil going negative, which was an anomaly. But still oil is low today, in the $20s, and it’s simply not high enough to repay the billions of dollars of debt that was invested in the industry over the last decade.