Kristian Rouz — The financial struggle in the US energy sector has been exacerbated dramatically in the fourth quarter, as a yet another drop in crude prices, combined with the junk bond meltdown in December, have triggered a massive wave of oil and natural gas bankruptcies across the nation, with more liquidations of energy assets to follow in the coming year. The scale of energy bankruptcies has reached its 2008-2009 levels in Q4, according to the Texas monetary authorities, erasing multiple jobs in an industry which was booming not too long ago.
The Federal Reserve Bank of Dallas reported that the total amount of debt of the now-bankrupt oil companies has exceeded $2 bln. The liquidation of the 9 energy companies would take a severe toll on the US labor market, with some 70,000 jobs lost in Q4 alone. The industry is poised to shrink unless oil prices rise, which might actually happen as a direct consequence of the eroding competition in the US energy sector.
"Lower oil prices have taken a significant financial toll on US oil and gas producers, in part because many face higher costs of production than their international counterparts," the Dallas Fed research team wrote in a note. "If bankruptcies continue at this rate, more may follow in 2016."
Black Elk was hit the worst: adding to the financial insolvency, the company attracted the attention of federal authorities that opened a criminal investigation into the 2012 explosion at their drilling platform in the Mexican Gulf, which left 3 people dead and caused an oil spill.
The slump in oil prices down to $37/bbl from approximately $114/bbl over the course of the past 18 months has reflected negatively on most US energy companies, forcing them to cut costs and save money. Laying off workers and idling oil derricks have become a common practice among the drillers, but the worst thing they did was to over-borrow, counting on higher returns amidst high oil prices; the latter wouldn't remain.
"Some producers are getting very, very far out there with what they owe their suppliers," John Sparacino of the Houston, TX branch of the law firm Vorys, Sater, Seymour and Pease said.
The low oil prices might persist well into the coming year, the Dallas Fed said. According to the regulator's estimates, the international oil supply might outpace demand by 600,000 bpd, with oil inventories accumulating till late 2017, at which point the global economic acceleration would provide for demand to outpace the supply again.
According to Goldman Sachs' calculations, after Iran resumes its full-scale oil shipments, an additional 640,000 bpd would find its into the global market in 2016.
"Given the great uncertainty surrounding projections and the timing of supply and demand changes, the coming year promises to be a dynamic one for the oil markets," the Dallas Fed noted.
The involuntary bankruptcy cases filed against the aforementioned energy small caps were in some cases initiated by larger energy companies. For instance, international oil giants Baker Hughes and Schlumberger filed a bankruptcy lawsuit against Miller and Energy & Exploration Partners. The small cap was liquidated shortly afterward.
"If oil continues below $40 a barrel, we should expect to see even more energy filings, both voluntary and involuntary," John Penn of the Dallas-based Perkins Coie said.
There is currently immense monopolization momentum gathering on in the US energy sector, suggesting that crude prices will go up in 2016.