Fewer Oil Companies Are on the Edge of Bankruptcy — Is This Really Good News?

Tyler Chase, Managing Director Energy and Utilities Industry Leader
Robert L. Patrick, Director Corporate Restructuring and Recovery
In this Industry Perspective series, we offer the views of Protiviti leaders on developments and news in specific industries. The perspective below focuses on Energy & Utilities.

A recent update from Debtwire states that 135 oil companies headed for bankruptcy is good news compared to the 180 companies that were on the Debtwire list in January. According to the article, oil prices have recovered from their lows around $26 a barrel and are now hovering around $50, which has helped some companies stabilize. Most of the companies on Debtwire’s list have already eliminated jobs and closed plants, so the industry appears to have hit bottom, the article claims.

Our perspective:

It may be prudent for oil company management teams and investors to hold back on optimism-based strategies for the present time.

Oil market fundamentals and the U.S. economic outlook portend, at best, flat results for the foreseeable future. That said, and as crazy as it might sound, the energy industry was the highest performing industry in 2016, so those that have had positions in energy stocks have benefitted. However, investors who are willing to accept the oil market- and company-specific dangers inherent in placing capital into distressed oil and gas companies should not be looking for immediate returns in 2017.

Those who have been waiting for the industry to “hit bottom” before pulling the trigger on new investments, acquisitions or expansions might want to add this decreased trend of bankruptcies to other recent optimistic news (for example, an energy-friendly federal administration, oil stabilizing around $50/bbl, OPEC cutting production) as an indicator that the industry is headed in the right direction.

Bottom line: Even if a lower number of oil companies appear to be headed for bankruptcy, the industry’s stress is likely to continue and companies will need to continue to strengthen their profit-and-loss monitoring and forecasting, risk management analysis, and strategic planning processes.

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