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"Oil Drillers Are Going To Die" In Q2, Conway Mackenzie Warns "Expect Outright Liquidations"

Tyler Durden's picture




 

"The second quarter is going to be devastating for the service companies," warns Conway Mackenzie - the largest U.S. restructuring firm - adding that, despite slashing thousands of jobs, delaying (or scrapping) billions in capex amid the prolonged rout in oil prices, "there are certainly companies that are going to die." As Bloomberg reports, oil drillers will begin collapsing under the weight of lower crude prices during the second quarter and energy explorers who employ them will shortly follow with oilfield-service providers are facing a "double-whammy." As we noted here, there are more than a few candidates for this 'death' list as it appears increasingly clear that what was considered an "unambiguously good" narrative for the nation is anything but...

 

As Bloomberg reports,

Companies that drill wells and manage fields on behalf of oil producers will be the first to fall after the benchmark American crude, West Texas Intermediate, lost 57 percent of its value in seven months, said John T. Young, whose firm led the city of Detroit through its 2013 bankruptcy.

 

Oil companies have slashed thousands of jobs, delayed billions of dollars in projects and dropped or scaled back expansion plans in response to the prolonged rout in crude prices. For oilfield service providers that test wells and line the holes with steel and cement, the impact of price reductions forced upon them by explorers will start to pinch hard during the second quarter, Young said Thursday.

 

“The second quarter is going to be devastating for the service companies,” Young said in a telephone interview from Houston. “There are certainly companies that are going to die.”

 

Oilfield-service providers are facing a “double-whammy,” he said. Even as oil companies are demanding 20 percent to 30 percent price reductions, they’re also extending wait times before paying their bills, enlarging cash-flow gaps for the drilling and equipment firms, he said.

 

...

 

The amount of projected 2015 oil and natural gas output a company has hedged is a strong indicator of whether they’ll be able to pay their bills, he said. Another important metric is how much is drawn on revolver loans, Young said.

 

“I’m telling them they really have to keep an eye on this stuff and you’ve got to be the squeaky wheel,” he said. “You’ve got to start filing liens if you see a company starting to go down.”

*  *  *

Wondering who is top of the list? As we detailed previously, there are plenty...

Readers will be most interested in the "restructuring/bankruptcy" option, most applicable for Group 4, because these are the names which,  all else equal, will file for bankruptcy first.

This is what Goldman's Jason Gilbert has to say:

We believe oil market weakness presents H&Y E&P management teams with difficult decisions. For certain stronger companies, the challenge may be one of deciding if and when to high grade the portfolio through M&A. For some weaker companies, the decisions may be more stressful, with many lower-quality names being forced to consider (1) selling themselves, (2) restructuring/filing for bankruptcy protection, and/or (3) bolstering liquidity through asset sales and/or second lien debt issuance.

 

We have created a 2x2 matrix, shown in Exhibit 1, where we classify E&Ps according to both asset quality and balance sheet strength. In Exhibit 2, we provide the backup data on each company that justifies its classification in the chart below.

The matrix in question:

 

Group 4: Weak balance sheet/weak assets

This group includes companies with leverage above 2.5x and assets we rate “B-“ or lower. Names we highlight are Approach Resources (NC), Exco Resources (NC), Goodrich Petroleum (NC), Halcon Resources (IL), Magnum Hunter (NC), Midstates Petroleum (NC), Rex Energy (NC), Sabine Oil & Gas (U), Samson Investment (NC), Sandridge Energy (IL), and Swift Energy (U).

 

We view management teams in this group as facing the most difficult decisions. Given the general lack of “core” assets, we believe strategic interest from a larger acquirer is less likely than for Group 3. Furthermore, with the bonds in this group generally trading below $80, we believe 101% change of control provisions act as de facto “poison pills” for acquirers. 

 

Given high leverage and the lack of strategic interest, we believe many companies will need to seek alternative sources of capital. While the options here will vary case by case, we note that most of these names have secured debt baskets that can be used to bolster liquidity. Based on the phone calls we receive, investor interest in this type of security remains high, which suggests to us we will see robust second-lien issuance as soon as the conclusion of 1Q earnings. The bottom line is that, for now, we think investors should tread lightly in this group, despite the average bond yield of 19% (excluding obviously distressed names Swift Energy, Samson Investment, and Sabine Oil & Gas).

*  *  *

As Conway McKenzie's John Young concludes:

"When I saw WTI hit $65, I thought we’re going to be really busy with restructurings,” Young said. “When it hit the $40s, I knew we were looking at outright liquidations."

 

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Sat, 01/24/2015 - 18:37 | 5700515 A Lunatic
A Lunatic's picture

I guess we'll just have to go back to getting our free oil from Iraq.......

Sat, 01/24/2015 - 18:37 | 5700523 El Vaquero
El Vaquero's picture

Speaking of Iraqi oil, wouldn't it be funny if it were discovered that the black market buyer of the oil sold by ISIS was none other than the US or a US based entitiy? 

 

(No, I'm not saying that this is what is going on, just pointing out that it would be funny, in a sick, twisted, gallows humor kind of way.)

Sat, 01/24/2015 - 18:41 | 5700528 ZerOhead
ZerOhead's picture

Drill Baby Drill...

Sat, 01/24/2015 - 18:45 | 5700539 Crisismode
Crisismode's picture

 

 

"there are certainly companies that are going to die."

 

Yes, there are ALWAYS companies that are dying,

as are there always companies that are being born

 

This is a complete non-sequitor . . . .

Tell us that 85% of these companies are going to die, and

then we will pay attention to what you say

(and ask for links to reference your research, BTW)

 

 

Sat, 01/24/2015 - 19:34 | 5700650 Sudden Debt
Sudden Debt's picture

Good buying opp’s. out there!

Just pick those servicers under contract through 2016 and who are already drilling at sea.

they crashed bigtime but seadrilling on wells that run for over 2 years are still profitable at 30 to 40 bucks.

And they’ve been smacked down just like the rest.

It’s called buy low sell high so it’s not like the herd will buy these at the bottom :) they like to buy high and sell low :)

 

Sat, 01/24/2015 - 23:44 | 5701231 cnmcdee
cnmcdee's picture

2008 Banks go broke - Feds print $16 Trillion in secret loans to hold them all up.

2015 Oil Companies go Broke - Nothing happens - how *dare* those oil companies create middle class jobs that is forbidden!

Sun, 01/25/2015 - 00:02 | 5701266 Handful of Dust
Handful of Dust's picture

Banruptcy lawyers are going to have a Golden Era !

Sun, 01/25/2015 - 09:55 | 5701776 winchester
winchester's picture

we drilled some folks...

Sat, 01/24/2015 - 19:26 | 5700633 Sudden Debt
Sudden Debt's picture

RELAX!

The oil is trucked to turkey (they have hundreds of trucks and it’s well organised)

And from turkey it’s all shipped to Europe.

Terrorisme is bad unless you can make a buck on it I guess...

That’s also why Turkey is contra the IS bombings... I wonder why...

Oh! And turkey is buying it at 30 bucks a barrel so what do they care if oil is at 46, it’s still a 50% profit

Sat, 01/24/2015 - 20:04 | 5700727 Carpenter1
Carpenter1's picture

You have a deeply flawed understanding of what's occurring in the world and oil industry.

Sun, 01/25/2015 - 05:56 | 5701612 Sudden Debt
Sudden Debt's picture

I work in the oil sector. What do you do?

Sat, 01/24/2015 - 19:04 | 5700578 junction
junction's picture

A bad time to lose your job, only 26 weeks of unemployment insurance benefits in most states. 

Sat, 01/24/2015 - 19:50 | 5700674 Creepy A. Cracker
Creepy A. Cracker's picture

How many years of living off of other people's money is reasonable?

I'm not trying to minimize losing one's job.  It's rarely a good situation although some people do come out ahead with the next job.  I'd just like to know.  Should other people pay for someone who lost their job for three years?  Is two years good?

Sat, 01/24/2015 - 20:13 | 5700751 Carpenter1
Carpenter1's picture

It seems we have no shortage of applicants for knife catching here, most of them likely already bleeding profusely from multiple wounds received at $80, $70, and $60.

Now they tell us this will be over soon, get ready for $150 oil, blah, blah, blah.

Get ready for $20 oil, and a global deflationary collapse. You won't see $150 oil unless there's a major war, but it might be too major, wiping out hundreds of millions= less oil consumers

Sun, 01/25/2015 - 11:40 | 5701969 Yao
Yao's picture

Pffft.  I lined up local jobs for every single crew member that I laid off.  In every case their new gigs would feature: better hours, better working conditions, nearly identical pay rates and, often, better benefits.  And they were sure things, placements in organizations run by friends who'd promised to hire these guys as soon as they showed up to fill out applications.  How many do you suppose showed up and filled out applications?  None.  Zero.  Nada.  Zilch.  How many do you suppose are employed today?  None.  Don't feel too sorry for the crews being laid off because, while there's a great deal of variation, I'm at least as much the rule as the exception.

Mon, 01/26/2015 - 00:07 | 5704931 Ward cleaver
Ward cleaver's picture

Remember the good old days of 99 week xtensions?
POTUS finally figured out that cutting back to 26 means more people
disappearing off the unemployment #'s and now unemployment
under 6%. One smart cookie

Sat, 01/24/2015 - 18:37 | 5700521 kaiserhoff
kaiserhoff's picture

Here's the real news story of the year, so far...

China yesterday announced a third option: they will effectively raise salaries of government workers by 60%.

If this does not result in a mass uprising and slaughter of apparatchiks, I don't know what would.

Sat, 01/24/2015 - 18:43 | 5700527 El Vaquero
El Vaquero's picture

What would is when they have to choose between panem or circenses.

Sat, 01/24/2015 - 18:48 | 5700543 Crisismode
Crisismode's picture

 

 

Oh, I dunno . . .

Does China also run sweatshop Bureaucracies???

 

 

Sat, 01/24/2015 - 18:44 | 5700538 Soul Glow
Soul Glow's picture

China still pegs to the dollar and that raise was likely necessary; they are going through high inflation too.

Sat, 01/24/2015 - 18:49 | 5700544 kaiserhoff
kaiserhoff's picture

Only for government workers?

That's a 180 turn to the iron fist of Mao, and all the slavery it contained.  It may take some time, but there will be a reaction.

Sat, 01/24/2015 - 19:09 | 5700589 sun tzu
sun tzu's picture

Shouldn't everything be getting cheaper as the USD is stronger?

Sat, 01/24/2015 - 20:28 | 5700753 Renfield
Renfield's picture

It's going higher, but in this case that's not the same thing as getting stronger.

"Stronger" entails, well, strength. IMHO, the USD is rising mostly because satellite currencies are getting dumped for USD and the USD is gradually being dropped from trade, but it's difficult for most of us to tell because the derivatives market is hidden from public view. So the public numbers are just one set of symptoms, of a fatal contagion that has now taken hold in the giant derivatives mountain. IMHO, the USD is not buying more stuff because the credit market is starting to collapse.

But to those of us outside of the shadow banking system, there are not enough "public" symptoms yet to be sure. Sort of like how you might have ebola, but the only symptoms you are aware of is a headache and a slight queasiness.

I think trade and productivity are beginning to repudiate the USD. Ironically the higher it goes, the faster it is being abandoned in favour of more flexible tools. (Not necessarily paper.)

I am not educated in finance so I'll defer to anyone with a better explanation, but FWIW I think "stronger" is the wrong word in this case.

Sat, 01/24/2015 - 20:50 | 5700844 new game
new game's picture

seems as thou you are moar educated than most of the princeton havvvvard pawns...

Sat, 01/24/2015 - 18:38 | 5700525 Soul Glow
Soul Glow's picture

It has been happening in masse already.

Sat, 01/24/2015 - 18:42 | 5700531 4shzl
4shzl's picture

Liquidations occur in societies committed to capitalism and market economics.  In crony-friendly, corporate welfare havens, not so much.   

Sat, 01/24/2015 - 18:46 | 5700536 AmCockerSpaniel
AmCockerSpaniel's picture

There is always losers for there to be winners. By head count, I see more winners than losers.

Sat, 01/24/2015 - 18:49 | 5700545 TuPhat
TuPhat's picture

Asolutely good.  Bubbles are not good.  Extreme price fluctuations are not good but someone does benefit.  In this case everyone who uses diesel or gasoline or has anything shipped will benefit.  That means most of us.  It may only last for a short time but I will enjoy it while I can.  Just because I wasn't allowed to go to the party with the Fed punchbowl does not mean I have to cry for those that did.  Onward to the collapse!

Sat, 01/24/2015 - 18:50 | 5700546 falak pema
falak pema's picture

Don't worry they live in the Bible belt and LAzarus's example will resuscitate them.

Sat, 01/24/2015 - 19:12 | 5700593 sun tzu
sun tzu's picture

You still live in your mother's ass

Sat, 01/24/2015 - 19:59 | 5700714 falak pema
falak pema's picture

obscure but not obscurantist ! 

Sat, 01/24/2015 - 18:57 | 5700553 will ling
will ling's picture

why has the oil patch been so quiet 'bout their gov sellin' 'em down the drain? lambs to slaughter? if so, they deserve what they get.

Sat, 01/24/2015 - 18:58 | 5700559 wmbz
wmbz's picture

~ Conway Mackenzie Warns "Expect Outright Liquidations"

That's the nature of the beast dude! Into each life a little rain must fall.

Meanwhile I'll enjoy $1.78 gasoline, or lower!

Sat, 01/24/2015 - 19:51 | 5700699 will ling
will ling's picture

wrong. not nature of beast. an artificial  "market" event.

Sat, 01/24/2015 - 19:01 | 5700567 SillySalesmanQu...
SillySalesmanQuestion's picture

The domestic oil producers were sacrificed...for the greater good of maintaining the stauts quo

There will be even more sacrifices later to keep the illusion and ponzi going..

Sat, 01/24/2015 - 19:01 | 5700568 kchrisc
kchrisc's picture

Some think that recessions, and depressions, are an undesired consequence of the Zionist banksters' thefts. In reality they are a feature of the system.

They steal deposits, counterfeit loan-money, reap the interest, and then when the bubble goes poof, they rake in the underlying collateral from the "debtors." If the bust is larger than anticipated, they then make the theft from their depositors all kosher with a violence-puppet, government, backed "bail-in."

The banksters need to repay us.

 

You can count heads on it.

Sat, 01/24/2015 - 19:07 | 5700579 Clesthenes
Clesthenes's picture

“The second quarter is going to be devastating for the service companies.”

It just isn’t fair.  We sponsor the Iraqi War to gain access to Iraqi oil and to boost our profits; we shift the expense of the war ($2 trillion) onto American tax payers; and now this.

We’ll just have to tell our flunkies in Congress what we need.  And they won’t have to guess.

Sat, 01/24/2015 - 19:13 | 5700595 I_rikey_lice
I_rikey_lice's picture

“The second quarter is going to be devastating for the service companies and trucknutz.”

 

                            Fixed

Sat, 01/24/2015 - 19:14 | 5700597 Ms No
Ms No's picture

And why is it that the Cheney, Boone-pickens, Bushies etc are not shrieking for scorched earth against the Sauds for destroying the "shale miracle"? 

Also, were the Sauds not recently doling out cash like crazy to their population in order to prevent disorder and subsequently being hung by the sheets they wear on their heads? 

Apparently, we are to believe that Big Oil interests have turned to pascifism and the Sauds are financially omnipotent. Whatever they are up to they better make it quick.  

Sat, 01/24/2015 - 19:31 | 5700646 Rootin' for Putin
Rootin' for Putin's picture

BOO HOO a bunch of overpaid assholes loose their jobs.  I for one am looking forward to the sudden surge of cheap fancy pickups they cant afford anymore.
However i am sure the booze, lapdance, antibiotics and weed industries will lament their leaving.

Sat, 01/24/2015 - 19:44 | 5700681 Pareto
Pareto's picture

And the truck nuts that go along with them.

Sat, 01/24/2015 - 19:34 | 5700654 Lumberjack
Lumberjack's picture
Bill Barrett Director Jim W. Mogg Purchases 25,000 Shares (BBG)

http://www.lulegacy.com/2014/12/15/bill-barrett-director-jim-w-mogg-purc...

Sat, 01/24/2015 - 19:36 | 5700661 WTFUD
WTFUD's picture

We may be in the gutter but we're looking up at the stars.

Let's build an Ark and start over.

What we really really need to get us through this crisis is one of them O'Barry speecheZ.

Ask not what your country can do for . .
FUCK OFF CUNT
OK

Sat, 01/24/2015 - 19:47 | 5700689 Cloud9.5
Cloud9.5's picture

Think beyond a couple of quarters and truck repos.  The shale miracle and the mirage of American energy independence is blowing up.  What’s coming next is five dollar gas.  The economy keeled over and passed out on four dollar gas.  Think what will happen with five dollar gas.  We are going through another systemic shock.  This one may bring on the collapse. 

Sat, 01/24/2015 - 20:27 | 5700784 The Shape
The Shape's picture

I'm surprised no one sees past the next fill up of their tank.

US supply is decimated. No one will be throwing as much money at them next time.

Projects are shelved all over the world. Saudis have only ever been over 10 million barrels a day for two months and their massive infill drilling program last year yielded them a production flatline.

We're looking at $150 within 18 months.

And here's the real kicker, when we hit $150, the Tylers will be posting $250 oil articles like mad!

Sat, 01/24/2015 - 19:55 | 5700701 Creepy A. Cracker
Creepy A. Cracker's picture

I had a fairly substantial liquidation on the toilet last week.  Pepto-Bismol fixed it.

Sat, 01/24/2015 - 19:57 | 5700712 Last of the Mid...
Last of the Middle Class's picture

Don't they have connections to their senator, or representative, they should all qualify for TBTF money of some sort.  I mean you can't just let a business go under can you? That's not the american way

Sat, 01/24/2015 - 20:01 | 5700718 Two Theives and...
Two Theives and a Liar's picture

I remember seeing Boone-Pickens not too long ago say the "marginal" (shale) production can ramp back up relatively quickly if the crude price goes up again....which I personally IMHO don't expect anytime soon!

Sat, 01/24/2015 - 20:34 | 5700800 homiegot
homiegot's picture

Because recovery.

Sat, 01/24/2015 - 20:36 | 5700801 new game
new game's picture

unless you are one of them, ha, fed/zirp/nirp/kens/krug policies are wreaking havoc on real peoples lives, just like 08 a-fucking-gain. if only these people had the ability to direct their anger at thee criminal parasites...

Sat, 01/24/2015 - 21:01 | 5700891 directaction
directaction's picture

Cheap oil and low interest rates is directing all the low IQ morons to buy fully loaded trucks and SUVs again.

After these idiots suck up the fuel surplus, and the drillers are out of business, and their 26 weeks of gravy are over, they'll be fighting over shopping carts.

This time next year gas'll be back up, maybe even higher than it was, and these idiots' useless trucks'll be lined up in shoddy used car lots, festooned with red and blue balloons, chain-smoking guys in cheap suits and even cheaper sunglasses'll be trying to hustle them off on even lower IQ morons. I can't wait. 

Sun, 01/25/2015 - 00:07 | 5701273 Handful of Dust
Sun, 01/25/2015 - 11:58 | 5702017 Chad_the_short_...
Chad_the_short_seller's picture

OAS puts anyone? I know I continue to buy them. OAS is going to zero folks. Position yourself accordingly

Sun, 01/25/2015 - 12:58 | 5702254 Last of the Mid...
Last of the Middle Class's picture

If you're in the oil bidness and you haven't stacked your rigs, laid off your crews, dumped your unnecessary leases, and checked on your contracts, you're waaaay behind the curve. Oh and not to mention, give a nice reach a round to your banker.

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