The Next Energy Problem
Has Shale Oil Peaked?
Last month we mentioned that conditions in the U.S. oil patch had turned ugly again in 2019 following a year of relative stability. That’s hardly a news flash. Any doubts about whether the domestic energy sector was on the verge of another downturn have been clarified in recent months, as monthly Chapter 11 filings have approached levels of mid-to-late 2016 when the energy bust had just passed its peak.
Already there have been 50 energy-related bankruptcy filings in 2019 through September compared to 40 in all of 2018 — nothing near the horrible numbers of 2015-2016, but clearly a reversal of the progress made after that wipeout. If this pace continues, energy-related filings (excluding coal) will end the year 50% higher than in 2018.
Distressed debt levels in the energy sector have also jumped in recent months, often a reliable indicator of future defaults. Distress in the energy sector has been so widely covered that it’s a challenge to add meaningful commentary to the conversation. Still-depressed energy prices have driven most of the recent filing activity; the group includes some Chapter 22 filers who emerged with too much takeback debt in anticipation of a better price environment that didn’t materialize, as well as exploration and production (E&P) companies that managed to avoid Chapter 11 in 2015-2017 only to succumb in 2019 under the pressure of persistently low prices.
The prevailing narrative is that the U.S. energy sector is a victim of its own success.