A central tenet in the thesis by analysts about the oil markets rebalancing has been that as prices declined, oil companies would be forced into bankruptcy. That in turn would lead to declining production, and eventually a rebalancing of supply and demand in the market, followed by higher prices. That process is already taking longer than many expected, and it looks like more time is needed. That additional time to balance the market is being driven by an unexpected factor; bankrupt oil companies are still pumping.
As oil prices have declined, the number of bankruptcies and distressed oil majors has quickly risen into the dozens. In fact, a recent Reuters analysis suggests little effect on production from when companies enter bankruptcy. Reuters cited Magnum Hunter as a primary example of this reality.
While Magnum Hunter filed for bankruptcy in December 2014, the firm has scrambled even in Chapter 11 to keep its oil flowing, resulting in O&G production rising by roughly one-third between mid-2014 and late 2015. The firm has used the protection bankruptcy courts to help stave off creditors while keeping the pumps flowing full tilt. Nearly all of Magnum Hunter’s 3000 wells are still producing crude, and that makes sense for several reasons.
This post was published at David Stockmans Contra Corner on April 26, 2016.
Recent Comments