The oil boom made its fair share of billionaires -- at least on paper -- and now the bust in oil prices is claiming its own casualties. The 50% decline in oil prices since last summer was bound to lead to distress, at a minimum, and at worst, a number of companies will go bankrupt because they can't compete in the new energy market.
This week, we got some more bad news from the industry, as bankruptcies continue to mount. So far, no big players are in trouble; but that may not be the case for long if oil prices continue to tumble.
Closing for business
In the last week, BPZ Energy, Dune Energy, and Cal Dive International all filed for bankruptcy. These aren't exactly household names in energy, but they could be the tip of the iceberg in the energy industry. Stephen Sather of LexisNexis Legal Newsroom recently compiled nine energy bankruptcies since October with aggregate debt of $2.4 billion. Not surprisingly, eight of those companies were based out of Texas.
Slowly, low oil prices are putting enough pressure on companies that bankruptcy is seen as the only way out. One problem is that low oil prices may get worse before they get better. I highlighted last week that growing inventory in U.S. storage facilities could lead to a plunge in the price of oil by summer. If that happens, more bankruptcies are on the way.
Looking for a way out from under oil prices
The usual course of events when a market crashes is that small players are hit first because they have a harder time accessing debt markets, and may be leveraged to a small segment of the market. That's the case with most of the energy bankruptcies we've seen so far. But problems are starting to arise at larger companies, as well.
Whiting Petroleum (NYSE:WLL) has at least flirted with the idea of selling itself to a larger energy company because it sees problems ahead with its own financial situation. It swallowed Kodiak Oil & Gas at just the wrong time, and now has $5.6 billion in debt that it may eventually have problems paying for. Buyers mostly scoffed at taking on the company's entire debt load, and now Whiting looks like it will try to sell some assets to reduce leverage.
Continental Resources (NYSE:CLR) and LINN Energy (NASDAQOTH:LINEQ) are two more companies that have used debt to fuel production growth. If oil prices stay low for too long, they could be in the same position as Whiting, selling off assets for wholesale prices.
Worse yet for Continental Resources, CEO Harold Hamm sold most of its oil hedges last year, betting that oil prices would turn quickly. Continental has a lot to lose if oil prices continue to fall.
This isn't the end of oil bankruptcies
During the last few years, far too many companies used high oil prices to justify rapid expansion plans fueled by debt. Today, that's coming back to bite them, and 2015 could see a rush of bankruptcies if the oil market doesn't turn quickly.
With oil piling up in U.S. storage facilities and production showing no signs of slowing, I don't see a reason to think prices will rise significantly, at least not soon. The oil boom in the U.S. could be coming to a fast end; for too many companies, that end will take place in a court filing for bankruptcy.