Bankruptcies Plague American Oil Patch

What is the reason for spike in bankruptcies in the oil sector?

Drivers in Wisconsin have been noticing it’s getting cheaper to fill up their tanks lately as gas prices are at the lowest level in more than a dozen years. In fact, the price of gasoline has been averaging $1.59 per gallon according to petro-analysts. This is due to two factors: the cost of a barrel of crude oil has been hovering at $30, and there is a glut of winter-blend fuels in the market. While the price of gasoline may start to rise as the warmer months require higher ethanol blends of fuels, consumers have been seeing more money in the pockets because of the low gas prices. That’s the good news. The bad news is that the oil industry has been forced to scale back and is seeing a wave of bankruptcies.

Bankruptcy Filings in the American Oil Patch

In 2015, about 67 U.S. oil and natural gas companies filed for bankruptcy protection — a spike of 379 percent from the prior year when oil prices were substantially higher. The boom in U.S. oil production over the last several years was triggered by the advances in “fracking,” but the abundant supply of oil has come back to haunt the oil patch.

Oil prices have continued to tumble this year, leading to another five energy gas producers filing for bankruptcy, and many observers believe more are on the horizon. While cheap gas is a boon for drivers, the flip side to cheap energy prices is the failure of dozens of drilling and servicing companies. This demise is also costing thousands of jobs — and unemployment is a key reason for personal bankruptcy filings. As was recently reported, bankruptcy filings in Wisconsin and across the nation fell in 2015. Nonetheless, the problems plaguing the oil industry may bring about an uptick.

Reasons for Oil Industry Bankruptcies

The shale boom along with high production levels form the OPEC cartel caused a glut of crude oil on the international markets. The price of a barrel of oil in mid-2014 was over $100; now the price is falling below the $30 floor. There has also been a steep drop in natural gas prices. With the shale boom and promises of high profits, many producers acquired massive debt in order to fund expensive drilling. Now that oil prices have tanked, revenues for these companies have fallen, cash flows have withered, and the oil producers have not been able to pay their debts. While some companies have been able to ride out the storm by cutting spending and slashing jobs, higher leveraged entities have been forced into bankruptcy.

Why this matters

The capital structures of oil producers are complex, and disposing of assets can be a slow process. Many analysts believe the first wave of bankruptcies is only a precursor as more companies will be unable to pay their debts, some of which are publicly traded oil and natural gas producers. The question remains as to whether there will be a ripple of bankruptcies for other businesses and individuals who depend on the energy sector. In the meantime if you have questions about bankruptcy or other debt-related issues, you should consult with an attorney who has expertise in bankruptcy law.

Republic Airways Files for Chapter 11 Bankruptcy

What are the reasons for Republic’s filing for bankruptcy and how will it help them regroup?

Republic Airways, based in Indianapolis, filed for bankruptcy this past week in an attempt to revitalize its operation. Republic operates a fleet of smaller planes, providing flights for larger airlines, including American Airlines, Delta Air Lines, and United Continental.

Reasons for Republic’s Financial Troubles

Republic blames its financial woes on a lack of pilots, explaining that this is the primary reason for its failure to succeed during a period when most major airlines are doing remarkably well. According to its report, even though it signed a three-year union contract with its pilots last year, the company still had to ground aircraft while renegotiating agreements with larger carriers and re-establishing the terms of leases for its aircraft.

The Pilot Problem

During negotiation of its labor contract, Republic states that it was losing about 40 pilots every month, but adding only 30. Dan Akins, an aviation consultant involved in the negotiations between Republic and the pilots’ union, the International Brotherhood of Teamsters, explains that while the new contract did stabilize the pilot base, the resulting higher pay for pilots meant Republic had to get increased compensation from Delta, American, and United. Akins view is that Republic turned to bankruptcy as a last resort to coerce the three major airlines to pay the higher fees it required, though he believes “they did not want to do it.”

All of this was complicated by the fact that the U.S. Federal Aviation Administration (FAA) increased required flight experience sixfold for first officers during this same period. Since first officer pilots now must have 1500 hours of flight experience, and the FAA set new limits on duty times, the process of hiring qualified pilots has become even more difficult.

The Need for Bankruptcy

Bankruptcy is never the first choice, but it can be a company’s salvation. Under bankruptcy protection, Republic can request that the judge cancel unprofitable contracts, and will also permit Republic to escape leases for planes that are too expensive or planes that it’s not actually flying. As Republic’s Chairman and CEO Bryan Bedford stated, ” It’s become clear that this process has reached an impasse and that any further delay would unnecessarily waste valuable resources of the enterprise.”

Recent History of Airline Bankruptcies in the U.S

Republic’s filing for bankruptcy is not unprecedented, though it is the first filing by a large airline since American went into Chapter 11 in 2011 and Feeder Pinnacle Airlines filed for court protection in 2012. Other major airlines, far from having financial difficulties, have reported major profits during recent years.

Bankruptcy Provides Hope, Not Certainty

Like so many businesses in similar straits, Republic hopes that by filing for bankruptcy it can ensure a bright future, though, as CEO Bedford recently notified his employees, he “can’t promise how it will all work out.”

If your business is in financial difficulty, for whatever reason, and you are considering bankruptcy proceedings, you should contact a reputable, experienced bankruptcy attorney to help you weigh your options.