The oil and gas sector is currently experiencing a mini boom cycle as economies are gradually reopening and oil demand is starting to return to appearances of normal. Oil markets are in an optimistic mood again, with oil futures trading sharply higher on Wednesday after the US government reported a third weekly drop in weekly inventories, while the International Energy Agency (IEA) released a bullish oil report for 2021 After falling 8.7 mb / d last year, the IEA now expects global oil demand to increase 5.7 mb / d to 96.7 mb / d in 2021.
However, for many shale producers in the US, there is still little to cheer, with record numbers for Chapter 11 bankruptcy protection.
According to energy and restructuring law firm Haynes and Boone, bankruptcies by North American oil producers climbed to its highest level in the first quarter since 2016 as energy companies are still struggling to recover from the 2020 oil price crash massacre.
Haynes and Boone have reported that there were eight bankruptcies by North American oil and gas producers in the first quarter of 2021, the second-highest for a first quarter since 17 were reported for the first quarter of 2016, the last time that US crude oil futures fell below $ 30 a barrel over the past decade.
Crude oil prices have rebounded from the lows of a year ago, with the WTI trading around $ 63 a barrel on Friday, while Brent changed hands at $ 67 a barrel.
Related: Oil demand could spike by 2026: Goldman Sachs
Source: Haynes and Boone
Small businesses in trouble
The big difference this time around is that smaller producers appear to be the main victims, with only $ 1.8 billion in total debt for the quarter, the second lowest in Q1 total after $ 1.6 billion in Q1 2019.
For some perspective, consider that U.S. energy companies filing for bankruptcy had $ 53 billion in total debt last year, the second-highest total since 2016 when debt totaled $ 56.8 billion.
As expected, Texas remains well represented, with half of the bankruptcy filers from that region.
HighPoint Resources Corp. (NYSE: HPR) was the largest debtor to file, with $ 905 million in secured and unsecured debt.
In addition to oil and gas producers, a total of five oilfield service companies also filed for bankruptcy, with offshore drilling machine Seadrill Ltd (OTCQX: SDRL), which accounts for most of the industry’s $ 7.2 billion debt.
Inflection point
Fortunately, many producers and oilfield service companies have reached a tipping point, with the outlook for energy demand improving significantly from just a few months ago.
Last week, the IEA has one bullish oil report for 2021 where it revised global oil demand by 230,000 barrels per day by 2021 to 96.7 mv / d, an increase of 5.7 mv / d from 2020 levels. The energy watchdog has based the upgrade on encouraging economic indicators, although it says the recovery remains fragile due to rising Covid-19 cases in key consumer regions.
For example, in the April update of the World Economic Outlookthe IMF raised its forecast for global GDP growth for 2021 and 2022 to + 6% and + 4.4% respectively.
The United States received the biggest upgrade thanks to the rapid roll-out of vaccines and strong stimulus packages. The United States has unveiled the fastest vaccine rollout in the world to date Bloomberg, putting itself in a good position for a complete reopening of the economy. The latest vaccination rate is 3,053,566 doses per day, meaning it could cover 75% of the population, or the so-called herd immunity rate, in just three months.
The IEA says the greatest demand growth will occur in the second half of the current year, with strong demand growth requiring an additional 2 mb / d of extra crude oil to keep markets well supplied.
Meanwhile, JP Morgan has estimated that Permian’s oil drilling rigs in the Delaware Basin now need oil prices as low as ~ $ 33 / barrel to decline from $ 40 / barrel in 2019. JPM says most US onshore operators are economic at current oil prices, and that many operators do too. probably even to ramp up activity in H2 and build solid momentum for higher volumes in 2022.
Hopefully those Chapter 11 filings will end soon here.
By Alex Kimani for Oilprice.com
More Top Reads from Oilprice.com: