The American oil industry is on the verge of more bankruptcies amid low demand for crude, market analysts say.
Los Angeles-based California Resources, which has racked up a hefty $4.9-billion debt, said in a filing with regulators on Tuesday that there is "substantial doubt " it will stay in business if it is unable to restructure its balance sheet.
The short-term picture is bleak for Chesapeake Energy, the country's second-largest producer of natural gas. The Oklahoma-headquartered shale gas pioneer said this week that it might consider filing for bankruptcy protection after it lost $8.3 billion in the first quarter of 2020.
US crude futures have fallen by roughly 60 percent since the start of the pandemic, and the recent uptick in prices might not be enough for debt-laden producers to survive.
Many companies have taken cost-reducing measures, laying off hundreds of workers and shutting down wells. In Texas alone, at least 6,000 energy workers have been either laid off or furloughed.
The once-upstart Whiting Petroleum became the first casualty of the COVID-19 pandemic in early April. The bankruptcy club was then joined by Diamond Offshore, Freedom Oil and Gas, Skylar Exploration, and Hornbeck Offshore Services.
Spencer Cutter, a credit analyst at Bloomberg Intelligence, predicted last month that there will be "a wave of bankruptcy filings" in the energy sector this year. Asset manager Pickering Energy suggests that from 15 to 40 percent of around 9,000 US oil and gas companies could be pushed into bankruptcy within the next two years.
Oil producers need to sell crude at around $50 per barrel to just stay even; the price is between $50 and $55 for shale oil. Even as a gradual loosening of coronavirus restrictions is expected to drive up the prices, the average price per barrel is expected to remain much lower than needed in 2020 ($33 according to IMF estimates and $32 according to the US Energy Information Administration).
For the time being, oil companies that go bust are choosing the more optimistic Chapter 11 protection, used to exchange debt for equity. However, as the economic downturn continues to scare off investors, some may be forced to go the Chapter 7 path: liquidation.
"Chapter 11 requires financial sponsors to back you. You may see more Chapter 7 liquidations," Reid Morrison, US energy leader at PwC, has told CNN.