Free oil won’t last. But it may linger long enough to persuade some creditors of bankrupt energy drillers to freeze their court fights awhile so they don’t wind up running a company with a product no one wants to buy.
At least seven North American oilpatch companies have gone bust so far this year, and that was before oil futures started trading at negative prices. This is dimming prospects for creditors who had counted on recovering most or all of their investments. Losses in those cases give energy lenders an incentive to put court fights on hold, or to back delay of bankruptcy in hopes that prices will rebound, just as retailers and landlords declared a time-out when the Covid-19 pandemic closed stores around the world.
“Wherever possible, companies and creditors will take a pause to see how the world and the market develops over the next few months,” said Damian Schaible, co-head of the restructuring group at the law firm Davis Polk & Wardwell. Some of his clients are energy creditors who fought takeover deals they initially made in bankruptcy court after the calculations underpinning the offers were upended by oil’s price collapse.
In recent years companies have negotiated a deal and then filed for Chapter 11 protection, hoping for as short a time as possible in bankruptcy. That may change, said Martin Sosland, a bankruptcy lawyer in Dallas with Butler Snow.
“What you are more likely to see is old-fashioned Chapter 11s,” Sosland said. The company will linger in court to get “a breathing spell to reorganize or sell at a higher price.”