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.