Several months ago, we discussed how oil companies could use Chapter 11 bankruptcy to survive. The condition, though, is that oil prices would have to rise for some of these companies to survive Chapter 11 bankruptcy.
Oil prices have stayed at around $35 to $40 per barrel for more than one year, driving many companies with higher operating costs out of business. This is especially true for companies producing shale oil, which involves higher operating costs and more expensive equipment. Keep in mind, only 18 months ago, oil prices were at more than $100 a barrel, making this industry much more profitable.
Many of these companies accumulated hundreds of millions or billions of dollars of debt in an attempt to rapidly expand. As we are seeing now, that tactic appears to have failed for many of these companies. Some press outlets have referred to these businesses as “zombie oil producers”, as they are essentially on life support.
Can Oil Companies Use Chapter 11 Bankruptcy to Survive?
Oil company bankruptcies have not been this widespread since the start of the Great Recession. These companies will be able to use Chapter 11 bankruptcy to reorganize debts, discharge others and stay in business. However, one of the major benefits of Chapter 11 bankruptcy is that companies are given another opportunity to become profitable. It is unclear at this point as to whether oil companies with billions of dollars in debt and high operating costs will be able to become profitable if oil prices stay low or decline even further.
This dilemma was briefly discussed in a recent article published by the Wall Street Journal, when the CEO of Magnum Hunter Resources speculated many competitors entered into Chapter 11 without an exit strategy.
The answer to our question would be, “it depends.” Depending on the market situation and business, some oil companies will see benefits, but others may have a more difficult time emerging from Chapter 11 bankruptcy. Regardless, all financially troubled companies create more options after filing for bankruptcy.