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Law360 (June 23, 2020, 8:20 PM EDT) —
The story of 2020 so far for the oil and gas industry: The financial reckoning is here.
The industry was girding for a flood of Chapter 11 filings even before the COVID-19 pandemic, with approximately $200 billion in oil and gas debt coming due within the next few years and virtually no help coming from investors. Then the pandemic led to a historic crash in energy demand.
Federal coronavirus aid provided a temporary stay of execution for some companies, but experts say that impact has already started to wear off.
The road through bankruptcy is proving to be bumpier compared to the previous bankruptcy wave of 2016-17, experts say. While some companies are still able to convince some of their major creditors to swap their debt for equity in a reorganized company, it’s a tougher and more expensive process as talk of banks riding to the rescue fizzles out.
The alternative of selling off a bankrupt company’s assets hasn’t been a cakewalk either, as oil prices still waffle and the pandemic clouds the industry’s near-term future. Meanwhile, experts say fights are already erupting over attempts by drillers to reject service and midstream contracts in bankruptcy.
Here, attorneys explain five significant oil and gas bankruptcy trends that emerged in the first half of the year.
Coronavirus Aid Is a Temporary Reprieve
The year didn’t start with a bonanza of new bankruptcy cases. Of the 35 bankruptcies for drillers, oil field services and midstream companies filed through the first five months of the year, 12 were filed in May, according to figures compiled by Haynes and Boone LLP.
Porter Hedges LLP restructuring and bankruptcy partner Eric English said the shock of free-falling oil prices earlier in the year, including a first-ever trip to negative territory, may have played a role in the initial slow pace of filings.
“To a certain extent, people didn’t know whether there was going to be anything to reorganize,” English said. “Now that we see a little more stability in the oil prices and hopefully some kind of recovery in the economy, people are a little more confident to do more restructurings and go through the process of a Chapter 11 to accomplish it.”
But experts also point to the loan program under the Coronavirus Aid, Relief and Economic Security Act — including the federal government’s expansion of eligibility requirements and allowing companies to…