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Inside, confidential and off the record


2015: The oil bankruptcies


2015: The Year of Energy Sector Bankruptcies

This year, bankruptcies in the energy sector “have reached quarterly levels last seen in the Great Recession”, the Federal Reserve Bank of Dallas reported . The global glut in crude oil supply coupled with low commodity demand is adversely affecting the oil and gas companies' balance sheet position. The value of their assets is plunging, while their liabilities are growing to troublesome levels.

In the fourth quarter of 2015, at least nine US energy companies, with more than $2 billion in liabilities, filed for bankruptcy protection. This number is likely to increase next year, as oil producers refuse to reduce output. In its December 4 meeting, the Organization of the Petroleum Exporting Countries (OPEC) decided to maintain their strategy from last year: to increase production and therefore maintain high market share. The exporting group has little interest in remaining a balancing mechanism in the industry, therefore, it has announced a monthly production target of 31.5 million barrels per day (bpd), up from last year's announced target of 30 million bpd. Moreover, next year, OPEC member Iran is likely to start exporting crude oil, following the lifting of western sanctions. This will ensure crude oil production continues to increase in 2016.

Non-OPEC oil producers have also been very resilient in 2015. Oman touched its highest production level this year, while Russia posted an impressive production growth rate. US oil companies have also performed well in the past three quarters: they have maintained their output despite falling rig count. Last week, the US oil rig count fell to 538, down from 1,600 in October last year. Though the low rig count was good for US crude oil, which closed above the global crude oil benchmark on Thursday, it could not help the West Texas Intermediate (WTI) cross its $40 per barrel. On December 24, WTI closed at $38.1 per barrel, while Brent settled at $37.89 per barrel.

Compared to other oil producers, US energy companies have been hit the hardest by low crude oil prices, because their cost of production has been higher than its international counterparts. This year, US oil producers laid off thousands of employees and cut expenditure on exploration and production (E&P) activities. In the recent quarter alone, US companies reduced their spending by 51%. If high production continues at current levels, it is highly probable that other US companies will face low earnings and cash inflow in the future, and an increased risk of bankruptcy.

The United States Oil Fund LP (ETF) ( NYSEARCA:USO ) closed at $11.3 on Thursday. The ETF has lost 45% of its value year-to-date (YTD), while United States Brent Oil Fund, LP ( NYSEARbCA:BNO ) settled at $12.38 on December 24.


Mushhood Khan/ Bidness Etc / Dec 27, 2015

ISSUES....12 / 28 / 2015 - Send Us Your Issues

ISSUES.... Inside, confidential and off the record
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