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Analyzing Producer Bankruptcies' Impact on Gas Production

June 2, 2016 | By Charles Nevle

The law firm, Haynes & Boone, LLP, maintains a list of North American producers who have filed for bankruptcy since the beginning of 2015. As of the most recent update of this list on May 16, 2016, 77 producers are listed, 35 of which filed for bankruptcy in 2016.

In this edition of Get the Point, PointLogic Energy will examine how much production is represented by the entities on this list and which patterns emerge in the volume and location of production held by these producers. Our inquiry yielded results that were both expected and unexpected.

In order to determine the amount of production attributable to the entities that have been identified as having filed for bankruptcy we utilized IHS’s Performance Evaluator, which is a dataset of state-reported wellhead production. We estimated production for each producer based on the latest state reported wellhead data.

For most states, the data is available through 2015. For some states, such as West Virginia, which only reports data annually, we used the latest data available, which goes back only as far as 2014.

So, while the details for individual producers may not reflect accurate current production, in aggregate they provide a great deal of insight about trends by region, state and Producing Area. In addition, by comparing at the gas production by these companies with the amount of oil production, we can see how gas production is being affected differently than oil production.

PointLogic’s analysis indicates that 4.4 billion cubic feet per day (Bcf/d) of gas production and 307,000 barrels per day (b/d) of oil production is represented by the companies that have filed for bankruptcy since the beginning of 2015. The production from these companies represents 5.4% and 3.6% of the lower 48 gas and oil production, respectively. 

 Gas Production Attributable to Companies in Bankruptcy

Looking at the table above, we can draw some initial observations:

  • The volume of gas attributable to the companies in bankruptcy is significantly larger than the corresponding volume of oil.
  • There are definite regional winners and losers. Of the major gas-producing states, Texas, Wyoming, Oklahoma and Louisiana bear the brunt of bankruptcy-related volumes. The entire Northeast, the Gulf of Mexico and Arkansas are largely unscathed.
  • Texas bankruptcy-related gas production represents 7.5% of the state’s total production, but only 2.8% of the state’s oil production is represented.
  • The major producing gas state with the largest percentage of bankruptcy-related production is Wyoming.

The data above confirms a lot of what we, and many fundamental analysts, would expect: 1. Gas is represented more than oil; and 2. Production volumes are skewed away from the Northeast. However, some insights are certainly surprising, such as the volume of gas represented and the degree to which the regionality of the impact is reflected.

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We want to be clear that just because a company is bankrupt does not mean we expect its production to go to zero, or to even decline.  However, production volumes tethered to companies navigating bankruptcy courts has imbedded risk. While operational strategies and financial flexibility are unique for each producer, bankruptcy courts may force asset divestitures. Suffice it to say that the regions that represent significant numbers of bankruptcies also face more production risk to the downside than regions that don’t.

This dataset provides potential trajectories for deeper dives. Below, we will look closely at Texas to seek clues about the dynamics operating in the Lone Star State. The large decline in Wyoming is tempting, and could prove to be a topic for further analysis in upcoming issues of Get the Point, but as the vast majority of this production is due to a sole producer, Ultra Petroleum, we think the story is richer in Texas and will focus our analysis in this issue to that topic.

Diving into Texas

A lot of focus in the gas-producing world has been directed at the Northeast, but Texas remains the state with, by far, the largest amount of natural gas production and an even greater share of oil production. At PointLogic, we break Texas into 17 Producing Areas. We report gas production for each of these Producing Areas on a daily basis. 

 Texas Wellhead Production by Producing Area

By combining some of the regions above, we arrive at a more simplified view of Texas production, as shown below.

In this graph, we see that over the past five years Texas production has grown, but that there are several moving pieces behind this growth. Essentially, growth in Eagle Ford and Permian is offsetting declines in other areas of the state. 

 Texas Wellhead Production by Select Plays

Within the list of 77 companies in the Haynes & Boone listing, PointLogic noted 41 companies for which we could identify production within the lower 48. Of these 41 companies, 26 of them have production within Texas. The total volume of production in Texas that was identified as attributable to companies which have filed for bankruptcy amounts to nearly 1.8 Bcf/d. Over 80% of this production is associated with just six producers, as shown below.

 Total Bankruptcy Associated TX Production

By taking the 1,457 MMcf/d associated with the six most prominent gas producers and cross-referencing with PointLogic’s Producing Areas, we find that the areas most represented as a share of total production are Haynesville, Other Texas East and Barnett.

 Production for Largest Bankruptcy Related Texas Producers

Notably, the Permian region is only mildly affected, with less than 1% of current production represented by producers who have filed bankruptcy. In fact, a strong inference from this split is that within the state, the oil-producing plays are significantly less impacted than the plays in which gas is the primary driver of production. This is true even within the Eagle Ford, as can be seen when we split the combined Eagle Ford play into PointLogic’s three Eagle Ford Producing Areas (see below).

 Production of Largest Bankruptcy Related Eagleford Producers

What the above table tells us is that the drier the production in the Eagle Ford (more methane, less natural gas liquids and crude), the larger the percentage of production that is attributable to producers who have filed for bankruptcy.

Bottom Line

The big takeaways here are:

  • Producers that have filed for bankruptcy are highly weighted to gas producers, rather than oil producers.
  • Bankruptcy-related gas production is skewed towards non-Northeast dry gas production.

As we have discussed in several recent Get the Point articles, the continued resiliency in lower 48 gas production in an environment of the highest storage inventory balances on record is setting up a battle to balance the market this summer without hitting storage capacity constraints. Crude oil is facing its own challenges, though recent strength in crude oil pricing near $50/bbl has led some in the market to prognosticate that the worst of the producers’ troubles are behind us. 

The above analysis indicates that just the opposite may be true -- at least in gas. If oil prices do recover this summer and producers increase drilling activity in oil plays as a result, we will likely see an increase in associated gas production. This would occur regardless of what natural gas prices are doing. Rising gas production from associated oil production would inflict bearish price pain on the gas market and make it that much more difficult for the market segment that has borne the brunt of bankruptcy agony -- dry gas producers.

Even without the prospect of oil-related drilling activity, the summer ahead looks to be a difficult price environment for gas. If bankruptcies are any indication of where production declines will be focused, the above analysis gives us a glimpse of where we should see those declines occur. As Haynes and Boone updates the listing of producers throughout the summer, we will keep an eye on how any new additions underscore the current dynamics or give clues to different emerging undercurrents.

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