By Timothy Puko and John W. Miller
Their owners may be bankrupt, but the sprawling mines of
Wyoming's Powder River Basin are still churning out coal. It is the
same story in oil fields along the Gulf Coast and with shale-gas
wells in the Rocky Mountains.
Energy investors have long hoped that falling prices would solve
themselves by driving producers into bankruptcy and stanching the
flood of excess supply. It turns out that while bankruptcy filings
are up, they have barely impacted fossil-fuel markets.
About 70 U.S. oil and gas companies filed for bankruptcy in 2015
and 2016. They now produce the equivalent of about 1 million
barrels a day, about the same as before they declared bankruptcy,
according to Wood Mackenzie. That represents about 5% of U.S.
oil-and-gas output.
That resilience has kept energy inventories flush and prices
capped. Oil shot to $50 a barrel this summer, but has had trouble
making much progress beyond that mark. On Friday, oil futures in
New York rose 0.4% to $50.85 a barrel.
The theory that bankruptcies would help balance the market "was
misguided to begin with," says Roy Martin, a research analyst at
energy consultancy Wood Mackenzie. "And people are starting to come
around to that now."
This is exactly the way chapter 11 was meant to work. The
process is designed to save companies that can be saved, and many
energy companies are using it to lighten their heavy debt loads,
adapt to lean times and keep producing.
Peabody Energy Corp., Arch Coal Inc. and Alpha Natural Resources
Inc. -- three of the five largest U.S. coal miners -- all filed for
bankruptcy in the past 18 months. They accounted for about 36% of
U.S. coal supply in the first half of 2015. This year, production
declined only in line with the rest of the sector, and their share
for the first six months was nearly unchanged at about 33%,
according to IHS Global Energy. Arch Coal and Alpha Natural
Resources recently emerged from bankruptcy.
"It is frustrating," said Adam Wise, managing director at John
Hancock Financial Services who helps oversee about $7 billion in
energy-related debt and private-equity investments. "A lot of those
companies just operate similarly to how they were prior to entering
bankruptcy. It definitely doesn't help."
Oil hit historic lows this year and, while it has rebounded
somewhat, at $50 a barrel it is just half of what it was three
years ago. Oversupply continues to hamper the market and has forced
analysts to retreat from earlier calls that oil would be at $60 or
$70 by now.
Even accounting for recent drawdowns, oil producers and
importers have added 18 million barrels to U.S. stockpiles this
year, bringing the total to a near-record 469 million. There was
enough coal on hand in the U.S. in July to fuel every coal-fired
power plant in the country for more than 80 days, up from about 70
days' worth in July 2015, according to the most recent data from
the U.S. Energy Information Administration.
"Without a reset button, there's no need for prices to go
anywhere," said Colin Hamilton, head of commodity research at
Macquarie Group Ltd. "It is a long grind."
Natural-gas prices have had a stronger rebound this year, but
they, too, are still below the highs of 2013 and 2014. U.S. coal
benchmarks have followed, with Central Appalachian coal up nearly
70% from a record low in the spring, but still down 15% from three
years ago, according to S&P Global Platts.
The long-term decline in prices has led to the bankruptcies, but
also to massive cost-cutting that helped producers keep mines and
wells profitable.
Since 2012, Peabody Energy has laid off 1,650 employees and
slashed annual capital spending to $111 million from $997 million.
The upshot: three big mines in the Powder River Basin recorded a
profit margin of $3.46 a ton in 2015, up from $3.45 a ton in 2011.
Peabody's operations in the region produce over 100 million tons a
year, enough to power 16 million U.S. households, the miner
says.
Midstates Petroleum Co. filed for bankruptcy April 30 and began
drilling a new well the next day. The company stopped running some
rigs ahead of bankruptcy, but kept one going after filing. Many
companies kept honoring some contracts for rigs and well services,
having planned drilling programs months in advance and still in
need to produce revenue for paying off creditors.
Other companies that went through the bankruptcy process are now
embarking on a quick return to stabilization or even growth. Halcón
Resources Corp., SandRidge Energy, Inc., Goodrich Petroleum Corp.
and Penn Virginia Corp. recently emerged from bankruptcy after
spending two to six months restructuring. Combined, they shed about
$7 billion in debt.
Goodrich plans to grow production "pretty dramatically,"
President Robert Turnham told The Wall Street Journal. The recent
rebound in gas prices makes drilling in Louisiana more profitable,
and the company is employing new techniques to save money. They
include reordering its well-site process to cut fracking time by
more than half, Mr. Turnham said.
Ultra Petroleum Corp. has yet to emerge from bankruptcy -- it
filed in April -- and it is already planning to add another rig
within months and triple its fleet to 10 in about two years. The
company has been renegotiating rig contracts and using bankruptcy
laws to force pipeline companies to renegotiate other
contracts.
"We get to run the company, and we're trying to do what the
bankruptcy rules or law suggests, which is to maximize the value of
the company run as a growing concern," Chief Executive Michael
Watford said in an earnings call on Aug. 11.
Bank lenders, reluctant to actually take ownership of assets
that have been used as collateral by borrowers, have been friendly
to troubled companies. During bankruptcy, Halcón, SandRidge,
Goodrich and Penn Virginia raised a combined $1.3 billion in debt,
largely reaffirmed credit lines from their banks.
Coal magnate Robert Murray in 2014 correctly predicted that his
rivals would file for bankruptcy. He pushed his Murray Energy Corp.
to take advantage of the opening with a two-year buying spree
fueled by $4 billion in debt. By this summer, Mr. Murray was
negotiating with lenders, customers and workers on a multipoint
plant he needed to avoid his own company's bankruptcy.
His miscalculation: that his rivals' bankruptcies would force
them to cut back. If they maintain production, "that pulls everyone
into what I call the bankruptcy sewer," Mr. Murray said. "These are
zombie coal companies chasing the ghosts of past markets."
(END) Dow Jones Newswires
October 23, 2016 18:06 ET (22:06 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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