This past Wednesday, we reported that in the latest twist of the energy sector collapse, liquidating oil and gas producers, and specifically their creditors, got a nasty lesson in trough cycle asset values when in one after another bankruptcy "stalking horse" aka 363 auction, they were not only unable to cover the outstanding debt (both secured and unsecured) through asset sales, but barely able to cover a tiny fraction of it.
"A lot of people got into this business and didn’t really understand the ups and downs of price cycles,” said Becky Roof, a managing director for turnaround and restructuring with the consulting firm AlixPartners. “They’re getting a very bad dose of reality right now.”
Becky is right as the following bankruptcy liquidation sales tabulated by Bloomberg demonstrate:
- Dune went belly up owing $144.2 million. Its assets sold for $20 million.
- In May, American Eagle Energy Corp. filed for bankruptcy with debts of $215 million. Its properties sold for $45 million in October.
- BPZ Resources Inc. owed $275.2 million. Its assets fetched about $9 million.
- Endeavour International Corp. went into bankruptcy owing $1.63 billion. The company sold some assets for $9.65 million and handed over the rest to lenders.
- ERG Resources LLC opened an auction with a minimum bid of $250 million. Response? No takers.
Then earlier today we learned that as part of its 363 Asset Sale, the 3rd largest bankruptcy of 2015 after Samson Energy and Sabine Oil, that of Quicksilver, the estate was only able to collect $245 million in cash proceeds from BlueStone Natural Resources. With $2.35 billion in debt, Quicksilver was one of the first casualties of the energy bust when it filed on March 17, 2015. Today's news means that the recovery for its creditors is a paltry 10 cents on every dollar of total debt, most of which will go to partially satisfy secured claims.
The problem as the chart below shows is that these bankruptcy auctions confirm recoveries on existing debt will be paltry, and based on our limited dataset, average to roughly 15 cents on total debt exposure, which includes both secured and unsecured debt.
The good news is that our data set won't remain limited for long. Here are several charts from Haynes and Boone showing why all those bankruptcy lawyers and financial advisors who were sitting back twiddling their thumbs for so many years, are now fully back in business.
First, the cumulative North American E&P bankruptcy filings, with some of the most notable filers for any given month:
Next, the cumulative debt that was gone "under" in the past year: some $17.2 billion:
Finally, the full list of all 2015 bankruptcies as of January 6.
In other words, the energy bankruptcy party is only just starting.
As a reminder, there are currently over 60 companies accounting for $325 billion in debt which are cash flow negative, a number which is about to surge as oil price hedges expire, unless of course oil manages to soar from here. If only 10% of these companies file in 2016, that would mean a doubling of the total amount of defaulted debt in 2015, and a shock to the entire US banking system which despite what it would like you to believe, it very much exposed to the next big default wave.
It's only downhill from there.