Has Another Energy Bust Begun?
Probably Not, But It’s Worth a Discussion
It was exactly four years ago this month that OPEC surprised global energy markets by announcing it would end its long standing role as a swing producer of crude oil, a role that supported oil prices in periods of oversupply. This announcement set off a collapse of global oil prices, with WTI crude oil plunging 52% in just six months, from $105 per barrel in mid-2014 to $50 by January 2015, before ultimately bottoming near $30 in early 2016. OPEC’s purported intention was to hit American shale oil producers, whose vast production of oil from unconventional fields had become a contributing factor to global oversupply.
Shale oil is more expensive to develop than crude from conventional sources, while the production profile of these wells is typically more front loaded and short lived, so U.S. shale oil producers, who increased leverage during the period of higher commodity prices and capital availability, were not prepared for the rapid price decline. The ensuing two-year period of depressed energy prices hit U.S. producers hard, with some 225 energy-related Chapter 11 filings in 2015-2016, not to mention dozens of out-of-court workouts. It was the worst rout of the U.S. energy sector since the mid-1980s.
The financial restructuring of an over-leveraged energy sector combined with a reduction in drilling and operating costs and a rebound in oil prices resulting from global economic growth helped put this painful episode in the rearview mirror by mid-to-late 2017 — or so the storyline goes. In reality, the energy bust of 2015-2017 was never entirely resolved, even as WTI oil prices briefly topped $70 in mid-2018. There is now mounting evidence that a new round of energy-related busts is upon us — just when you thought it was safe to drill again. How did this happen?
Global Co-Leader of Corporate Finance & Restructuring