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Whiting collapse is shape of things to come

The Denver-based shale company’s bankruptcy notice is likely to be the first of many among US producers

The collapse of the Opec+ agreement and the demand destruction caused by the Covid-19 pandemic looks set to push many US oil and gas producers over the edge in the coming weeks and months. Benchmark WTI crude was trading c.$20/bl in early April, below production costs at most US shale wells. As a result, the industry is likely to be hit by a wave of bankruptcies.

Denver-based Whiting Petroleum has been the first to go under, filing for Chapter 11 bankruptcy on 1 April, just days after drawing down $650mn from its credit facility.

The company announced on 16 March that it was slashing capex for 2020 by 30pc, with spending falling from $585-620mn as planned in February’s budget to a revised $400-435mn. Whiting CEO Bradley Holly said that the new plan would preserve the company’s liquidity while improving capital efficiency. But the move was clearly not enough. The value of Whiting’s shares had collapsed to $0.36 on 1 April on the New York Stock Exchange, from c.$8/share at the start of the year.

Shale players may have already made most of the efficiency gains they can following the previous price downturn in 2014

The company attempted to reassure the market that it had “more than $585mn of cash on its balance sheet and [would] continue to operate its business in the normal course” without any additional financing. Holly explicitly blamed the restructuring on the “severe downturn in oil and gas prices driven by uncertainty around the duration of the Saudi/Russia oil price war and the Covid-19 pandemic”.

First of many?

Whiting has assets covering 476,332 net acres spread across the Bakken/Three Forks play in North Dakota and Montana as well as 84,607 net acres in the Niobrara shale in Colorado. The company had proven reserves of 485.4mn bl oe as of the end of 2019 and produced 123,000bl/d oe in the fourth quarter of last year.

The company was once a significant player in the US shale industry, and is unlikely to be the last to seek refuge from its creditors. On the same day that Whiting made its bankruptcy filing, Reuters reported that Houston-headquartered Callon Petroleum had hired advisers to restructure more than $3bn in debt.

With demand in the doldrums and supply likely to rise further following the removal of the Opec+ output cap, the landscape for the US shale sector is bleak. And shale players may have already made most of the efficiency gains they can following the previous price downturn in 2014.

485.4mn bl oe - Whiting reserves at end of 2019

Artem Abramov, head of shale research at consultancy Rystad Energy, tells Petroleum Economist that “the next couple of years will be a trying time for the 9,000 or so US oil and gas operators”. Abramov predicts that WTI prices of $10-30/bl will result in many firms filing for Chapter 11 as they will no longer be able to service their debt.

“In a $20/bl price environment, some $250bn in debt could be at risk through the end of next year,” says Abramov. “While the most robust players can handle prices below $20/bl, the industry needs to see prices at $40-45/bl to prevent a surge in Chapter 11 filings.”

Whiting is one of many oil and gas producers to have drastically revised its spending plans for 2020 following the plunge in crude prices. Earlier this month, Callon announced that it was reducing its spending by 25pc, while Texas-headquartered Diamondback Energy said it would cut its capital budget by around 43pc and fellow Texas producer Parsley Energy said it would make a cut of 40pc. Other companies—both and large small—continue to follow suit as the unprecedented market conditions begin to bite.

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