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Shale group Whiting files for bankruptcy

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Via Financial Times

US oil and gas group Whiting Petroleum has filed for bankruptcy, becoming the first big independent shale producer to succumb to turmoil triggered by the coronavirus pandemic.

The Denver-based company had been due on Wednesday to repay $262m left outstanding on a convertible bond. The Financial Times reported in March that it had begun exploring restructuring options. 

The insolvency is likely to herald a wave of bankruptcies in the US oil and gas sector as producers are hit by soaring financing costs as their cash reserves dwindle, according to bankers working with several North American explorers. 

“Others will be following — $30 [a barrel] just doesn’t work for these companies,” said John Freeman, an analyst at investment bank Raymond James. US crude oil was trading at around $20 a barrel on Wednesday.

Shale gas pioneer Chesapeake Energy, California Resources and Gulfport Energy have each recently hired advisers to help them reduce their debt piles. 

“It’s symbolic of the bigger picture of what is going on in energy,” said Kevin Baer, co-founder of CKC Capital in New York. “The big takeaway is how far-reaching the damage can be from everything that is going on. It can be a very quick fall from grace for companies that have a lot of leverage. Whiting is the poster child for how this is playing out.”

Bradley Holly, Whiting’s chief executive, said the oil driller had taken steps to reduce costs and improve cash flow but the downturn driven by the pandemic and the duration of the Saudi-Russia oil price war had made filing for Chapter 11 inevitable. 

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“Through the terms of the proposed restructuring, we believe a right-sized balance sheet will enable us to capitalise on our enhanced cost structure, high-quality asset base and successfully compete in the current environment,” he said in a statement. 

Whiting is a major producer in the Bakken shale formation in North Dakota and Montana, and holds a large position in Colorado’s DJ Basin. Its output last year was roughly 120,000 barrels of oil and gas equivalent a day. 

“They’ve been in trouble for a while,” said Mr Freeman. “They were over-levered for several years.” Last month Whiting announced a 30 per cent cut in its planned spending for 2020.

The convertible note due on Wednesday had a fixed stock price in which it could be converted to equity of $156 per share, agreed five years ago when the company’s shares traded at roughly $140. But a long decline left Whiting’s share price at just 67 cents at the end of the first quarter. 

Whiting last week drew $650m of a credit line provided by a group of banks led by JPMorgan as it sought to prop itself up. The company has more than $2.4bn in outstanding bonds due to mature over the next six years. 

Whiting’s bankruptcy has sent the default rate for high-yield energy companies over the past 12 months up to 11 per cent, according to rating agency Fitch, with many issuers struggling in the face of lower oil prices and the spread of coronavirus. 

Other explorers have been desperately trying to cut their capital expenditure and dividend payments. Occidental Petroleum, the largest US oil producer, which less than a year ago splashed $56bn to acquire rival Anadarko Petroleum, recently cut its dividend by 90 per cent, slashed capex and trimmed executives’ salaries. 

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Moelis & Company, Kirkland & Ellis and Alvarez & Marsal are advising Whiting on the restructuring process. PJT Partners is acting as financial adviser for the noteholders, while Paul Weiss is providing legal advice.

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