Panelists see active oil and gas M&A in 2018 after 'bloodbath' of bankruptcies

Following hundreds of bankruptcy filings in the past three years, the oil and natural gas industry is showing signs of recovery helped by a recent rebound in commodity prices, although some see heightened mergers and acquisitions continuing in 2018.

A panel of experts speaking Feb. 7 at the NAPE Summit in Houston identified 116 U.S. oil and gas companies that have filed for bankruptcy since Jan. 1, 2015, most of the cases stemming from a big drop in oil prices in the second half of 2014. In total, the bankruptcies accounted for approximately $80 billion of secured and unsecured debt.

West Texas Intermediate crude oil futures prices fell from more than $105 per barrel in June 2014 to a close of $26.21/bbl just 20 months later in February 2016. In a similar time frame, Henry Hub natural gas futures fell from near $5.45/MMBtu in February 2014 to below $1.70/MMBtu by March 2016.

However, with WTI oil prices topping $65.00/bbl in January and natural gas futures reaching above $3.60/MMBtu, the bankruptcy trend appears to be losing steam with only 20 U.S. oil and gas producing companies filing for bankruptcy in the first nine months of 2017, compared to 64 cases the year prior.

"There is no doubt it's a bloodbath. I think we're all aware of that. The numbers are sobering," Jerry Schuyler, chairman of the board at Gastar Exploration Inc., said at the NAPE Summit.

In some cases, bankruptcy is a logical step for a struggling company to emerge stronger on the other side. Jesse Yanocha, a partner at Ares Pvt Equity Group, said that certain transactions or extensions of capital can help a company weather a down-cycle in commodity pricing. However "kicking the can down the road" in hopes of a price recovery is not always the best decision.

"Ultimately, bankruptcy could be the best solution," Yanocha said." As long as it can be done in a very facile and easy way, it can position a company for growth, without coming from the exit, [which is] not very good from our perspective."

But bankruptcy is rarely easy, according to Jason Binford, partner with bankruptcy law firm Gardere Wynne Sewell LLP, who added that a company's denial of its financial straits can be a "very long process."

"What a lot of companies don't realize — one of the counterintuitive things is how expensive bankruptcy is," he said. "It's very expensive to go broke."

Schuyler noted that companies operating in the oil and gas industry should take heed of what caused many of these bankruptcies, beginning with being ready and able to adjust to a down-cycle in commodity pricing.

"What surprised me is that there's a number of companies that didn't even have hedge policies in place… and that's just irresponsible," he said.

Schuyler also pointed to the need for asset quality. "You need to have a person or a team that's looking at buying and selling [assets] pretty much continually in my opinion," he said.

Finally, he stressed the need to include finance people on the company's management team, which tend to focus instead on engineering, geophysics and other technically-oriented positions.

The panel also pointed to an acceleration in upstream mergers and acquisitions with a total of 224 upstream M&A deals in 2017, a 13% year-on-year increase, while total deal value in 2017 was pegged at almost $182 billion, down 10% on the year.

Despite the decrease in deal value, Schuyler highlighted the increase in deal activity. "I think that's going to continue into this year," he said.

"The free market is a great and unforgiving teacher," Schuyler said. "I really believe that one of the reasons the activity has picked up is because people are getting more realistic about the buy and sell prices. The other thing is that a lot of teams and companies are getting a hell of a lot smarter about how to buy and sell intelligently."

Seven mega-deals, which are valued at $5 billion or greater, were logged in 2017, for a total value of almost $75 billion, up 30% on the year, according to the panel.