Restructuring Options for Michigan Oil and Gas Companies
Somewhat lost amid the flood of news about the COVID-19 health crisis, and even discussions of the economic downturn more generally, is the fact that oil prices have recently plummeted below $20 per barrel, down more than 60 percent from early January. That may be good news for consumers (although there is little use for gasoline these days), but it’s most definitely bad news for oil and gas companies in Michigan and throughout the country.
Oil and gas companies are facing a perfect storm consisting of a rapid contraction in demand due to the economic downturn and an increase in production due to a price war between Saudi Arabia and Russia. These circumstances are leading to distress across the oil and gas industry. The Financial Times recently reported that, among the giants of the industry, Occidental Petroleum announced a 90 percent cut in its dividend, and Chesapeake Energy hired restructuring advisors to help it manage its $9 billion in debt.
But it's not just those at the upper end of the market who are suffering. Hundreds of smaller, often family-owned oil and gas companies across Michigan are feeling the pinch.
Michigan is not often considered a major energy producer, but oil and gas companies play a significant role in the state’s economy. According to the Michigan Oil and Gas Association, the sector employs 47,000 people in Michigan. If prices remain at current levels for any period of time, it will be difficult for many companies to stay afloat.
Oil and gas exploration and production companies in Michigan, like all others in the industry, face high operating costs for drilling, production and transportation. Many also rely on burdensome and liquidity-constraining debt to fund capital-intensive projects.
While many businesses are no doubt working through out-of-court restructuring options to weather the storm, for some bankruptcy will be inevitable. With no clear end in sight to the current crisis and oil price plunge, oil and gas companies in Michigan should be implementing immediate, across-the-board measures to survive.
Priority number one is increasing cash flow. With few, if any, drilling and exploration projects offering a positive return on investment with prices at (or anywhere near) $20 per barrel, companies need to cut capital spending, as well as variable costs as much as possible to increase cash flow.
To shore up finances, companies should be attempting to negotiate price reductions from vendors and suppliers, and also evaluating their labor forces and instituting layoffs in order to reduce labor costs to offset reductions in revenue.
In addition, businesses should consider disposing of non-strategic assets in order to raise cash. While a down market is not the ideal time to be a seller, businesses may have no choice but to consolidate in order to survive.
Finally, it’s important to evaluate restructuring options available under the U.S. Bankruptcy Code. Chapter 11 bankruptcy offers oil and gas companies the opportunity to have a breathing spell to restructure their debts, streamline their business operations, and emerge as a stronger entity. Many oil and gas companies have used Chapter 11 to regain their footing in recent years, and during this economic downturn it’s likely that many more will be forced to follow suit. Businesses who plan for the possibility of a Chapter 11 filing while they are still viable, as opposed to those who stumble into bankruptcy as a last resort, tend to have far better outcomes.
If you have any questions about restructuring options for your business, please contact David Dragich at email@example.com or 313.886.4550.