Oil refinery | Credit: Pixabay
As these unusual times continue to wreak havoc across various industries, the energy sector hasn’t been spared. Oil prices have dropped significantly; by some estimates, it could fall as low as $20 a barrel. But perhaps more importantly, the demand for oil and gas is not nearly where it used to be.
Despite OPEC+ reaching an agreement to reduce crude oil production and effectively stop its price war, oil prices still fell. Countries are leaking big money — for instance, estimates have Russia losing some $100 million a day from not reaching an agreement to cut crude production sooner.
But on a smaller scale, companies are hurting too. Take Whiting Petroleum Corporation, the largest crude oil producer in North Dakota and a publicly-traded company that does over $2 billion in annual revenue. The company had to file for Chapter 11 bankruptcy protection just two weeks ago.
The issue for companies like Whiting that rely on crude oil is that profit margins are already fairly thin. In many cases, the break-even price point for American shale oil drillers hovers around $40 a barrel.
Forecasts aren’t looking too good either; some show demand could decrease by up to 30 million barrels a day, or approximately one-third of what it normally is. At this rate, oil companies need to be able to hit the brakes and cut production.
Not too long ago, crude oil businesses were riding high, growing accustomed to oil prices in the 60s per barrel. Now, it’s a matter of how many exploration and production (S&P) businesses can stay afloat, even if they conventionally have ample resources to do so.
Will many S&Ps go bankrupt in the next few years as a result? Pioneer Natural Resources PXD CEO Scott D. Sheffield thinks so, telling the Wall Street Journal “Probably 50% of the public E&Ps will go bankrupt over the next two years.”
One company investors are worried about is Chesapeake Energy CHK , a public company that has been on the Fortune500 list for 14 years and does well over $10 billion in annual revenue.
Today, investors are monitoring the company closely, on-edge about the possibility of the company also going bankrupt. It’s bad timing; the company has quite a bit of debt on its balance sheet — almost $9 billion of it coming into 2020.
The challenge? If companies can’t refinance debt or fail to meet their payback obligations due to slowed revenue, their bank accounts won’t last forever. Plus, lenders are now reducing borrowing capacity, making it even more difficult to inject cash as crude oil may continue to fall. Chesapeake has reportedly already hired restructuring advisors, which signals it may not be able to skirt Chapter 11.
If even large companies are facing major balance sheet challenges to stay afloat, we can only imagine how difficult it can be for relatively smaller companies that also rely on crude oil as a key revenue stream.
In these markets, nobody can definitively say how low oil can drop or when it will rebound. But among that uncertainty, there won’t be without bloodshed.