By Irina Slav
Remember the wave of bankruptcies that hit shale E&Ps and oilfield services providers in the shale patch between 2015 and 2017? Over those two years, more than 120 oil and gas producers filed for bankruptcy protection in the United States, figures from Haynes & Boone showed last year.
Since then, it seems that life has not been much different for many of these post-bankruptcy survivors.
Bloomberg’s Alex Nissbaum, in a recent story on the fate of those less fortunate drillers, noted SandRidge Energy as “the poster boy” for post-bankruptcy oil and gas companies that are still struggling to get back on their feet but may never succeed.
SandRidge exited bankruptcy last year but has found it difficult to return to growth mode for a number of reasons that are indicative of the challenges that remain in the U.S. shale oil and gas industry.
The most obvious one is that not all shale is created equal, whatever the industry tells us about lowering production costs and improving operational efficiencies.
Let’s forget this mantra for a moment. Everyone wants in on the Permian boom but not everybody wants in on certain parts of Oklahoma, for instance.
As one analyst told Nissbaum about the post-bankruptcy survivors, “The bottom line is a lot of these companies didn’t have very good assets to begin with. You can go through bankruptcy and wipe away debt and that’s all well and good, but the assets they ended up with are still not very attractive.”
The truth about how not all shale is created equal often gets ignored in the flood of upbeat news about well productivity and reserves. But some have been warning about this, including Art Berman and EOG’s Mark Papa. Not all shale plays are equally easy to exploit. Not all acreage within the same play is equally cheap to drill. And ultimately, you shouldn’t believe everything you hear from the oil industry.
The inherent “inequality” in acreage quality is just one of the industry challenges experienced by the struggle that companies recently emerging from bankruptcy.
Another is specific to them and it has to do with shareholders. The majority of these post-bankruptcy companies are now controlled by creditors-turned-shareholders who don’t have the industry background and the dedication it takes to make an oil and gas company successful, says Nissbaum, quoting a Haynes & Boone attorney.
These creditors-turned-shareholders are not interested in the long-term sustainability of the business. They want to get their money back and this prompts decisions that are not necessarily the best for the company.
That’s not to say that the bigger, healthier oil players in the shale patch are having a good time with their shareholders. Not at all – they are demanding, finally, some solid returns on their investment. Still, that’s better than having to deal with hedge funds and distressed debt buyers who want their money back now.
Finally, there is the possibility that these companies exited bankruptcy too early.
Everyone was grasping for straws after the oil price collapse and at the first sign of improving prices, after OPEC+ struck its deal to start curbing production, the shale industry started pumping again, buying into bullish oil price forecasts and demand projections.
The thing is, according to analysts at least, many of those eager to exit bankruptcy did not have the necessary liquidity to see the end of the crisis through and they didn’t plan ahead.
The question remains, however, if the rest of the pack–those who didn’t have to file for bankruptcy protection–did plan sufficiently ahead to ensure their long-term sustainability. Or did they simply follow their instinct telling them higher prices = more drilling?