Upshot of the March 9 markets meltdown for the U.S. shale industry? Survival of the fittest.

“We already had a number of U.S. shale producers that were very challenged because they didn’t have great balance sheets and were struggling,” Pearce W. Hammond, managing director for midstream equity research at Simmons Energy, told HartEnergy.com. “This just accelerates this process. It likely means several companies will go bankrupt.”

Michael Hurst, an oil and gas litigator and partner with Lynn Pinker Cox & Hurst LLP law firm in Dallas, sees it, too.

“I think it will be early in the second quarter where we will see companies that are holding on for dear life and finally letting go,” he said. “As much as we’d like to say this will be over in a matter of a few weeks, it doesn’t look like that’s going to happen.

“I do expect to see a great deal of insolvencies and bankruptcies in the energy sector in all aspects—upstream, midstream downstream and everything associated with oilfield services,” Hurst said.

Concerns over the spread of coronavirus, now in more than 100 countries, had been weighing on the equity markets for weeks. They fed worries about the global economy and its demand for oil. On March 9, the International Energy Agency (IEA) revised its global demand forecast for 2020 downward, expecting a 90,000 barrel per day (bbl/d) reduction in demand. It would be the first decline in consumption since 2009.

Hurst also expects a wave of M&A.

“I would expect to see quite a bit of merger activity,” he said. “I think you’ll see some of the bigger companies that are better capitalized and better able to financially weather the storms swallowing up some of the smaller, less-capitalized companies.”

Bad News

On March 6, Russia rejected a call by Saudi Arabia and other OPEC members to further reduce crude production by 1.5 million barrels. The subsequent realization that the previous round of cuts was no longer in place sent global commodities markets reeling.

The Trump administration responded with a statement that “attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world.”

But Joe F. Flack III, partner with Jackson Walker LLP in Houston, told HartEnergy.com that, as bad as things got on March 9, it was likely a temporary situation.

“We expect Saudi Arabia and Russia eventually to end their game of economic ‘chicken’ and come to an agreement on future production cuts,” Flack said. “We also expect oil prices to rebound to levels supported by existing demand once the panic over coronavirus settles [hopefully by summer].”

Then again, maybe not. If OPEC does not strike a deal in the near future, he said, continued extreme low oil prices will almost certainly result in serious geopolitical consequences. Consequences include:

  • Domestic oil and gas producers and their investors, lenders and service companies will face increasing financial pressure;
  • Stock markets will be roiled;
  • Domestic oil and gas drilling and production will decline;
  • Distressed oil and gas financings will increase; and
  • As Hammond and Hurst said, more oil and gas-related bankruptcies will be declared.

The rebound on the morning of March 10 that pushed both WTI and Brent up more than 8% won’t be enough, Hammond said.

“The energy markets are obviously very volatile and they certainly are capable of bouncing around,” he said. “But it doesn’t change the core thesis that OPEC+ is gone. The longer [the low prices go on], the more pain for the U.S. industry.”

If there is a bright spot in this, he said, it’s that consumers will pay less for fuel.

Finding Capital

If access to capital was difficult before the meltdown, some companies may now be in crisis.

“Capital was already challenging before this for U.S. shale because of the poor returns and investors are frustrated, plus more marginalization on the whole environmental, social, governance issues,” Hammond said.

Now it’s even tougher.

“It’s just going to separate those companies that are well-capitalized and have good liquidity and good assets from those that don’t,” he said.

Which means that, for some, opportunities will abound, Hurst said.

“There are opportunities that might ensue from this,” he said, particularly for investors who are flush with capital. Those players may be able to acquire companies, either from an equity standpoint or at a very cheap price. They might also potentially pick up assets cheaply from companies that are liquidating.

It also means that a lot of the fallout will end up in the courts.

“I think you will see a big uptick in litigation,” he said. “Probably in all the financial services litigation, you will see a rise in lender liability complaints. In the oil and gas industry, particularly, you’ll see a lot of contract-related litigation.”

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