Has the Time Finally Come for Distressed Energy?

In the early days of the oil price collapse, investors expected to quickly capitalize on a wave of bankruptcies and distressed assets. The long wait may finally be over.

The number of mergers and acquisitions among energy players has been on the rise in the second half of 2016. The reason: many energy companies are finally at the end of their rope.

Emanuel Grillo, a partner at law firm Baker Botts LLP, says many potential sellers were able to survive the early days by selling some assets and negotiating with lenders. Two years in, those options are starting to dwindle, and sellers are now realizing that the price being offered today for their assets may be the best they’re likely to get.

“We’ll see more out of that [scenario] over the next six months,” he says.

That’s driven, in part, by significant pent-up demand among oil and gas-focused PE funds, and the growing unwillingness of traditional lenders to further modify terms. “There was a ton of PE money and distressed hedge fund money raised to chase these assets. There’s some stability in the market.”

The first round of companies to break under the pressure of sinking oil prices were those in the exploration and production business. This year, there are more oilfield services-related businesses filing for bankruptcies, says Grillo, and he’s seen a lot of pre-packaged bankruptcies being done because a company can’t sustain its existing debt load. And there will likely be more bankruptcy filings from services companies because, although many people think the worst is over, “not everyone’s out of the woods just yet,” he says.

From a deals perspective, things began to turn in February 2016, when the market—and prices—hit a low. Producers then slowly started to climb back, and potential buyers took another look.

“There was confidence in the market and prices,” says Grillo. “We started looking at what transactions we could put together. What you’re starting to see is some straightforward transactions taking place in the Permian. We could see people starting a roll-up strategy. Even if prices don’t increase through the end of the year, [people see a] solid floor beneath them right around $50 a barrel.”

As time wears on, there’s little doubt that companies that haven’t restructured will have to make a decision on how to move forward.

“At some point, their debt will come due, and the question is if they’re able to refinance, be proactive and able to restructure debt,” he says. “Fifty-dollar oil will not solve everyone’s problems. They’ve survived the worst of it, and then it’s how do you move beyond that and grow? People that have been in survival mode see a break in the clouds.”