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News Oilfield Service Firms Go Bankrupt

  1. Dec 8, 2016 #1
    How this is supposed to work out is a mystery to me and someone will have to explain it. Here's the story:

    http://www.reuters.com/article/us-usa-energy-bankruptcy-analysis-idUSKBN13X0EG

    How is it the creditors automatically agree to take ownership of an ostensibly sinking ship, and what happens to all the shareholders? If they flat out lose their investment, doesn't that create some sort of economic depression? Doesn't the increase in this tactic taint oilfield service firms as a bad investment?
     
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  3. Dec 8, 2016 #2

    russ_watters

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    A company goes bankrupt when it is cashflow negative and its cash on hand reaches zero. At that time, the creditors don't really have any choice but to accept a lower payment on the debt because the company can't pay them the full amount if it doesn't have the money. The specifics of who loses what value is specified by laws and legal proceedings, but receiving partial ownership in exchange for reducing the debt means you just purchased part of the company.

    And yes, you could certainly say that US oil field service firms are currently exiting a depression and they were a bad investment until they hit bottom and started turning around. I bought a bunch of CHK earlier this year when they were at risk of bankruptcy. It was a gamble, but so far it is paying off handsomely.
     
  4. Dec 8, 2016 #3

    Vanadium 50

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    First, there are several different bankruptcy "chapters", each with its own rules of what is supposed to happen. In general, if a company ceases to exist, its assets are sold, and people are paid in the following order: the lawyers, holders of secured debt (i.e. bondholders), holders of unsecured debt (everyone else) and if anything is left over (and there usually isn't), it goes to the shareholders.

    In certain chapters, there can be a reorganization. Creditors can agree to accept less payment for their debt in exchange for an increased equity share in the company.
     
  5. Dec 8, 2016 #4
    In this situation it is probably better for everyone all around to have the company to still be in existence, rather than liquidate. Since all players in the oilfield service market are under financial pressure, an auction or selloff of assets would probably bring in much less value.
    Shareholders invest knowing that the gamble for profit can go either way. At bankruptcy, or even just before, the value of their equity in the company is practically zero.
     
  6. Dec 8, 2016 #5
    Thanks all for the answers, but I still don't understand. The problem may be that I don't understand the industry from the basics up. Here's the beginning of the article:

    So, the problem seems to be that there has been a slump in oil prices. My impression is that this industry reacts to that by stopping work, kinda like, 'It's not even worth it to bother when the price of oil goes below so much per barrel.' In the meantime, though, they still have debts to pay which aren't getting paid.

    So, it seems like low oil prices are only a part of the problem and that the rest is self-inflicted: they can't pay their debts because they refused to produce at the going price.

    Is that right?
     
  7. Dec 8, 2016 #6

    mheslep

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    The present value of US of crude oil production is $425 million per day, and in the last couple of years the US government has opened the global market to domestic oil producers via exports. So while dozens of oil companies have taken on too much debt relative to their revenue given low oil prices, the revenue itself is real, large, and remains likely to expand for some years to come, even if US domestic consumption remains flat to declining. Bankruptcy destroys debt, removes surplus drilling operations, but does not destroy the potential for oil revenue. The trick is to not be the company that is the one-too-many. Given the stakes involved, there always will be one-too-many.
     
    Last edited: Dec 8, 2016
  8. Dec 8, 2016 #7

    mheslep

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    Take another look at what you quoted. It does not say they stop work; it states, "oilfield service providers are ... filing for bankruptcy." As others have noted, bankruptcy does not mean the company necessarily stops work. It allows them some relief from their creditors, that is, to have creditors either take a deal (lower payments) or get lost.

    Bankruptcy has some risks: creditors, depending on their leverage, might insist on liquidating all the company assets but then oil revenue does go to zero, and in a down market the assets might be worth very little. And should the company seek to expand in the future, its going to need new debt. Bankruptcy doesn't make for good credit history.

    Most oil production areas in the US have drilling/production costs below the market price of oil at the moment, $50/bbl. The problem is that the cost of drilling/production plus debt payments might be greater than the price of oil. Solution? Lower the debt payments.
     
  9. Dec 8, 2016 #8

    mheslep

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    Exports:
    WTTEXUS2w.jpg
     
  10. Dec 8, 2016 #9
    Here's what I think I don't understand:

    It's not clear to me what that 40% loss of revenue means because I don't know how much they need to still be making a profit. Does that 40% loss of revenue mean they are going deeper and deeper in debt every day, or does it only mean they are making 40% less profit every day while still being able to pay their debts?

    What strikes me as fishy about the whole thing is that the story says most of this industry is filing for bankruptcy, even the companies that don't need to, because everyone anticipates a rise in the price of oil.
    It clearly says the reaction to the slump in oil prices is: "waiting out a slump in oil prices by idling machinery, laying off workers, and extending deadlines for repaying debts." The implication being they react to low oil prices by just not producing any, and allowing their debts to go unpaid.

    The bankruptcy is a completely separate thing, a reaction to the anticipated rise in oil prices. My question is: would they have gotten into debt had they not idled machinery and laid off workers and continued to help produce oil. Obviously they wouldn't have made as much profit, but would they also have needed the bankruptcy?

    Point being, someone must be getting screwed here by these bankruptcies, probably the shareholders, and doesn't that have repercussions?
     
  11. Dec 8, 2016 #10

    mheslep

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    Your description ('any') is of a firm gone out of business. Reuters description is of a firm going lean, *fewer* employees, idling *some* equipment. The cost and labor of producing oil from existing wells is a small fraction of that required to produce *new* oil: exploration, leasing mineral rights, rig setup and drilling operation, fracking, site restoration, new pipelines. So they keep producing, keep bringing in money from oil sales, though they stop expanding, which is what the price signal is telling them to do.

    In a US chapter 11 bankruptcy (the most common and the only type I'm familiar with), unsecured creditors lose first, then secured creditors (owners).
    https://en.m.wikipedia.org/wiki/Chapter_11,_Title_11,_United_States_Code#Priority

    There are private funds that specialize in finance for the oil and gas industry. The oil firm may also have acquired debt in the form of a contract to buy or lease a lot of equipment from an equipment manufacturer over time, and the bankruptcy court can cancel those contracts. All these people may have lost money, though they also may have made money money by loaning to the oil and gas producers in the prior years.

    In the marketplace, I suppose the most visible consequence for failing to pay debts would be higher interest rates in future money raising attempts, driving up costs relevant to the competition. There are other consequences. For instance, a common business practice is to enter into a contract at below cost, assuming the follow on business will be profitable. While the company is in Chapter 11, and that can be for some many months or years, it is prohibited from entering into any below cost contracts, a consequence that may actually shut the company's doors.
     
    Last edited: Dec 8, 2016
  12. Dec 8, 2016 #11
    These are the Service Providers, largely in the construction side. So when the oil priced slumped there is no incentive ( profit) in building more oil fields and infrastructure, or maintaining the older ( less productive) wells. This situation is part of the reason the Oil companies use Service Providers, they are easy to cut loos, while the oil comes out of the ground essentially for free ( actually I believe the number for extraction cost is about $10 per barrel)

    Still, in addition to day to day costs, they have debts that need to get paid, so even if they are able to stop production completely they have bills to pay. Large capital equipment may have been financed, and the executives get their pay and bonuses regardless.

    Revenue is the money they take in, if they are very good at controlling their costs (expenditures) they could see a 30-40% drop in revenue and remain somewhat profitable, but it would be tough, it is also common for distressed companies to take on additional short term debt - to pay the bills literally digging the hole deeper, if they can not wait out the slump - it tends to reach a tipping point and financially collapse very quickly.

    As for the creditor vs shareholders, the creditors have a contract guaranteeing they get paid, the shareholders are literally the owners. When a company goes into bankruptcy, the Owners are responsible for paying all of the Debt, if the Debt is worth more than the company is worth ( at least on paper) they effectivly have to give up their ownership, much like foreclosing on a house.
     
  13. Dec 8, 2016 #12
    The language of the Reuter's article does, in fact, suggest companies that are essentially "out of business" for all practical purposes:
    Krasoff is saying these bankruptcies are the attempts of dead (zombie) companies to come back to life and demonstrate they are now "in business" again. I don't read the word "zombie" as meaning "leaned down," I read it to mean something more like, "only as alive enough as it needs to be to claim it still exists at all."

    Very clear answer. Thanks much.

    What's your opinion on whether this would taint this industry in the eyes of investors. If there's widespread "restructuring" like this that leaves the shareholders 'foreclosed upon,' would they then balk at buying these stock in the future?
     
  14. Dec 9, 2016 #13

    m k

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    I think your first error was wrong level of zero.
    Even if a company has no money it can still be too big to fall and also be very small in absolute scale.
    It can also go down with much money, ie. in case of long contracts without future.

    Obviously energy oil is going down and chemistry oil is going up but how much.
    We already have some semi-conductive plastics.
    Coal based new tech is also coming.
     
  15. Dec 9, 2016 #14
    Which shareholder are you referring to:
    The ones who are offered to aquire shares from an IPO so that the company can raise capital.
    Shareholders from the secondary market, who trade shares, contribute no capital directly to the company.

    In the first case a IPO prospectus fulfills the plan of direction for the company and if you like it you buy in.
    The secondary market may be publicly traded and it may not.
    In both cases, potential profit is the motivator.
    Past experience doesn't have as much of an impact as future growth.
    Bankruptcy makes the likelihood of the future looking that much better.

    It's a complicated business. Not what you see just by watching the stock market.
     
  16. Dec 9, 2016 #15
    I'm talking about whichever one loses their investment if the company goes bankrupt.

    The article says this bankruptcy tactic is a new thing in the oilfield services industry. If that means it is now the way this industry is going to react when there's a recovery after an oil glut, then I'd suppose investors would try to sell their stocks as soon as it looks like oil prices are dropping from a surplus of it. That, in turn, would lower the value of the stock and the company.

    Russ lucked out, apparently, because the company he bought stock in never actually went bankrupt. Now the stock he bought at a low price is going up in value. If it had gone bankrupt like many of the other companies, he would have lost his investment.

    That's how it looks to me.
     
  17. Dec 9, 2016 #16
    That's good point. Actually an excellent point.
    Was it the "bubble" in the oil market that burst. Too many players entered when times were good, and with the downturn no one ( or few ), was willing or able to snap up companies cheap.

    As for investing into any company by purchasing stock, one never knows what the $1 put in will be worth tomorrow.

    As for the bankruptcy thing, if you are the manager of an investment house with a very poorly performing company on your portfolio, you could already be showing a negative return on an investment. So what to do. Give the company a shareholder loan with hope to keep them afloat, or agree or pursue bankruptcy for them, transferring their debt to give them a new balance sheet, and then show for the future perhaps a nice return on a bit of new capital injection.
    Looks better on paper.
    The major investors don't change all that much I wouldn't expect, just get re-arranged somewhat.

    Here is a court plan for Basic Energy.
    http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=26685772
    If you can make sense of all that ....
    These guys are way down on the list, but still for the 813$ million put in they do not walk away empty handed.

    I would think that for the holders of the old common stock, like I said before, already the stock is worth little.
    That loss happened way before the bankruptcy.

    There must be a financial guru somewhere out there to explain it all.
     
  18. Dec 9, 2016 #17

    mheslep

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    Agreed, "some" of them are "zombies", probably a large spectrum of outcomes. Examples of companies that have come out bankruptcy successfully include American Airlines(2011), Delta Airlines (2005), United Airlines (2002)
     
  19. Dec 9, 2016 #18

    m k

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    Shares can be irrelevant.

    Like a basic service company with rented space and machinery and minimal investments.
    Even its real purpose can be something else, like a shield for example.
     
  20. Dec 9, 2016 #19
    Astronuc, I think it was, posted an article recently about the guy who popularized fracking, and it laid the cause of the oil glut/low oil prices to him and that practice. Now, the Canadians and the Venezuelans have a kind of oil deposit called "sand oil" that is extremely extensive and potentially market flooding except that it can't be extracted by conventional technology and will have to wait till someone invents the sand oil version of fracking, the economical sand oil extraction method. Fortunately, no one seems to be in a rush to do that.

    I get how "restructuring" saves the company in question (not that I could read the link) by erasing it's debt and creating some assets. I just experience some cognitive dissonance in reading the article which cast it all in a positive light and failed to explore who was getting shafted, and what the consequences of that are. I'm still curious about that.

    Yeah, I read that but it didn't sink in till later: the bankruptcy doesn't kill the stocks, they're already dead.
     
  21. Dec 9, 2016 #20

    Vanadium 50

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    But there is a powerful indirect effect. If the issued shares could not be traded, they would be worth much less, and it would be much more difficult to use stock to raise capital.
     
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