California Resources Corp filed for bankruptcy on Wednesday night, sparking concern over a potential new wave of collapses among oil drillers and the businesses that depend on them.
The company joins more than 200 oil explorers that have filed for court protection since 2015, and more might be coming in a matter of weeks.
Denbury Resources Inc and Noble Corp missed their debt payments this month, and Chaparral Energy Inc asked lenders for more time, setting them on course for a possible default.
With oil prices hovering at about US$40 a barrel, the industry simply cannot support debts taken on when prices were near peak levels.
California’s biggest crude producer has been weighed down by massive borrowings since its spinoff from Occidental Petroleum Corp in late 2014, right at the start of the previous downturn in the crude market.
Low levels of cash and stricter state drilling regulations added to the pressure on California Resources, despite a US$320 million investment from Tom Barrack Jr’s Colony Capital Inc last year.
The company said it owed more than 50,000 creditors about US$6.1 billion, according to a Chapter 11 petition filed in federal court in Houston, Texas.
The bankruptcy is designed to reduce debt and other obligations by more than US$5 billion, the company said in a statement.
The proposed restructuring agreement is backed by about 84 percent of term-loan lenders who hold debt issued in 2017, and 51 percent of the firm’s 2016 lenders. The company’s joint venture partner, Ares Management, also backs the proposal.
To pay for the restructuring and to keep operating during the bankruptcy, the company would borrow about US$1 billion from a group of existing creditors, the statement said, adding that part of the money would be used to refinance a 2014 revolving credit facility.
Many investors have shunned producers operating outside of the Permian Basin of West Texas and New Mexico, the most prolific US oil patch. Even before the most recent price crash, US drillers were increasingly struggling to attract capital amid market volatility and growing doubts about their ability to generate returns for investors.
IMF WARNING
The IMF yesterday said that the rate of bankruptcy for small and medium-sized businesses might triple this year in the absence of sufficient government support, threatening to stall the economic recovery and cause financial instability.
A staff analysis of 17 countries suggests that bankruptcies for the firms could surge to 12 percent, from 4 percent before the pandemic, the IMF said in a report.
Italy would see the biggest increase due to a large drop in aggregate demand and high share of production in contact-intensive industries, it said.
Across the G20, relief from taxes and social security contributions, grants and interest rate subsidies have been an important salve, the IMF said.
Bankruptcy rates in the services sector in the average country might climb by more than 20 percentage points in administration services, arts, entertainment and recreation, and education, it said.
Essential activities like agriculture, water and waste, may experience only small growth in bankruptcy rates, the IMF said.
More than one-third of small businesses in Canada, South Korea, the UK and the US worry about viability or expect to close permanently within the next year, the Washington-based fund said.
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