The Last Resort: Chapter 11

As we have seen over the past 24 months, the number of companies that have either ceased operations or filed for bankruptcy in the Oil & Gas industry is on the increase.  While the price of Brent Crude is somewhat higher at ~ $49 US/BBL, the future is still somewhat cloudy.  Production globally is still at record numbers with a few operators at “over speed” but supply is a bit precarious with reduction events from offshore Nigeria to the oil sands of Alberta, Canada.   Maybe we bottomed out?

This may still be too late for Oil & Gas suppliers or Exploration / Producers who amassed mountains of debt over the few years to rapidly grow their organizations.  Money was cheap and easy to obtain as financiers also were motivated.  Business was also good or great at $110 US/BBL and notionally at, a certain scale, you could actually live off your cash flow.  Then bad planning, bad markets, bad management and bad luck lead to missed interest payments, cancelled dividends, idle assets and eventually the decrease of customer demand.

Looking into the airline industry of the past numerous operators took advantage of Chapter 7 or 11 when Jet Fuel prices went “sky high”.   We see a lengthy list from the iconic Pan Am to Air Canada to mention a few.   An interesting common factor among airlines is the rejection by the debtor of its current collective bargaining agreements among other discharges.  After satisfying certain requirements in the pre-planning, bankruptcy law permitted courts to approve the rejection of labor contracts.  With this tool, airlines were been able to reduce costs substantially.

Back to the energy industry, today there is even a new Bankruptcy Tracker online.  To highlight the severity to date, the amount of aggregate debt involved in filed cases has reached $17 billion for E&P’s and $5.3 billion for oilfield services companies.   Likely more are yet to come.

Most chapter 11 business cases deal with the restructuring of multiple types of debt including: priority tax debt, secured debt, unsecured debt and leases, while also seeking to protect the business assets.   As an example, if you had 20 aircraft worth $200,000 but you owed $400,000 you may ask the court to only pay on the collateral versus what is owed or not at all and dissolve the leases.   CHC Helicopter, who filed on May 5, was awarded, on May 12, the right to return 90 leased helicopters back to their owners from their original fleet of 230.

And that is all a function of the pre-planning by bankruptcy experts before they present a restructuring plan to the courts.  After all you must have a viable plan to get back to profitability.   Generally speaking, if you can negotiate the outcome with each creditor in your bankruptcy, you should be able to restructure the business debt in a way that allows you to emerge from bankruptcy lean and profitable.    Sort of like a cat cashing in another life.

Of course suppliers, employees and most importantly customers will also find this process challenging.    But to overcome a past negative credit history, you must build a reputation of strong financial management and creditworthiness.  This will rebuild your credit.   Strong and committed leadership is key.