Whiting Petroleum became the first U.S. upstream company to file for bankruptcy on April 1. Others are not far off, notable Chesapeake Energy and Denbury Resources which also hired debt advisors.
Smaller U.S. oil and gas producers, also known as wildcatters, have been heavily reliant on banks for liquidity over the past twelve month, as debt and equity finance options dried up. Lender have been conservative in valuing hydrocarbon reserves used as collateral, but the recent slump in oil prices have left them worried that some producers are close to bankruptcy.
Alta Mesa Resources and Sanchez Energy are two out of a bunch of energy companies at risk. Should the former go bust, banks are understood to get less than two-thirds of their loans, while a bankruptcy of Sanchez Energy could leave them empty-handed. Hence, some banks are hinting they will foreclose on an energy company and its properties if they do not repay their loan.
Banks could manage fracking firms for one year
By retaining such distressed companies temporarily in separate holdings, banks can avoid having to sell the assets for cheap. Instead, lenders could manage these indebted energy companies until oil prices recover enough so that the assets could be sold at a higher value.
However, banks would have to get a regulatory permission to realize their plans because of limitations on their involvement with physical commodities, sources told Reuters. By holding the assets for only one year, banks are hoping to comply with current Federal Reserve rules.
These day, the banks are understood to set up holding companies to bundle limited liability companies (LLCs) containing the distressed and seized assets. These LLCs would be held proportionally by the banks and financiers that handed out the original secured loan.