Why is Houston the epicenter for oil and gas bankruptcies in Texas?

June 15, 2020   By Dhoof Mohamed

Why is Houston the epicenter for oil and gas bankruptcies in Texas?

Bankruptcies are hitting the Texas economy hard amidst the ongoing pandemic. Prior to COVID-19, businesses operating in the oil and gas industry were already facing employee layoffs to improve their bottom line.

Besides the local and regional factors making business difficult for American oil and gas companies, there were rumblings of an international price war between Saudi Arabia and Russia. Just a few weeks before COVID-19 officially was declared a pandemic, Saudi Arabia and Russia began the oil price war. This put American oil and gas companies under extreme pressure and many businesses started to close and file for bankruptcy.

To complicate matters further, COVID-19 stay at home orders were put in place and the demand for oil and gas decreased exponentially. In the first quarter of 2020 alone, oil and gas companies in the U.S. reported billions in losses across several major oil and gas companies. Since Texas is home to the largest oil and gas economy in the U.S., it was most impacted from these losses.

Houston heavily impacted

The city of Houston specifically was one of the most affected cities in the world. Oil and gas companies headquartered in Houston reported billions of dollars in losses in the first quarter of 2020. Although oil has rebounded from the historic lows it was at several weeks ago, oil and gas companies are still cutting their budgets and laying off employees.

The city of Houston is seeing hundreds of corporate bankruptcies filed almost every week. This is due to several reasons:

Leverage:

Many oil and gas companies were already leveraged prior to the oil price war and COVID-19. The amount of leverage varies from company to company, but many of these companies were hundreds of millions of dollars in debt. If these companies were debt free, it would be easier to make adjustments and they would not have to lay off the majority of their workforce.

The 2015 price crash:

Many companies are still recovering from the debt they incurred in the 2015 oil price crash. Several socioeconomic factors caused oil in 2015 to crash for a period of time and companies rushed to take out loans in order to stay afloat. Many companies still have unpaid debts from this crash and that is one of the reasons they are overleveraged.

Financing:

Investors are unsure if consumer demand will return to normal levels and this uncertainty has caused a lot of caution. Banks and similar financial institutions have also fallen prey to the financial panic; besides extremely unfavorable creditors, most financial institutions are pausing business loans for the foreseeable future. This quick halt in financing has put oil and gas companies into panic and without immediate spending cuts, companies may have to shut down permanently.

When filing for bankruptcy, businesses adhere to specific rules depending on the state they are headquartered in. Businesses generally file for Chapter 11 Bankruptcy, which is geared towards large organizations.

There are times when filing for bankruptcy can actually benefit companies. Filing for bankruptcy can provide businesses with several legal advantages. Under Chapter 11 Bankruptcy, businesses can partially pay back their debts without added pressure from creditors. Businesses can continue to still operate until they decide on a plan of action moving forward.

The majority of these Houston based companies have filed for Chapter 11 bankruptcy. Following this, management at the company generally decides the direction of the business. For example, a company may be restructured and resume operations or its assets can be liquidated and it can be acquired. An acquisition can lead to a significant portion of the staff from the bankrupt company being retained. This prevents thousands of employees from being displaced and unemployed.

The Texas energy market, and the city of Houston in particular, continue to face the impact of COVID-19. It is unclear how long-lasting these effects will be as the oil and gas industry struggle nationwide.

 

Dhoof Mohamed writes about energy and IT topics for various clients. His academic interests include solar energy initiatives and the future of sustainable energy. His articles have appeared on SiteProNews, ChooseFlorida and the office of the U.S. Embassy. You can reach him at dhoof@dhoofmohamed.com.

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