Paul Jansen: Drilling down: The state of distressed debt and bankruptcies in US oil & gas – Mergermarket/Cortland Capital publication
Paul Jansen was interviewed by Debtwire and is featured in the Cortland Newsletter titled “Drilling down: The state of distressed debt and bankruptcies in US oil & gas.”
Debtwire: September and October 2017 saw a number of bankruptcy filings in the offshore space, including by Pacific Drilling and Seadrill. What are the biggest pressures currently facing the segment that are driving these bankruptcies? Do you see additional offshore companies filing for bankruptcy or restructuring their balance sheets in the coming months?
Paul Jansen: I think there are two main pressure points that are impacting the offshore drillers. One is that there is significant overcapacity of rigs. If you look at the current data, rig utilization is about a third of what it was at the peak levels. Simple math indicates that about two-thirds of rigs are on the sideline not being deployed at this point.
The other issue is that a number of offshore E&P companies filed for bankruptcy starting in 2015 and subsequently rejected their drilling contracts with companies such as Seadrill and Pacific Drilling. Those offshore drillers experienced depressed cash inflows because the E&P companies cancelled contracts with them as part of the bankruptcy process. However, the offshore drillers still had the obligation to take delivery of vessels that were no longer under contract. Both Seadrill and Pacific Drilling had contract rejections claims in the hundreds of millions of dollars when they filed for Chapter 11.
Debtwire: There seems to be a trend of consolidation developing in the O&G space, as some companies that have emerged from bankruptcy with reduced balance sheets prove to be appealing targets. Do you expect more tie-ups in 2018 among distressed companies?
Paul Jansen: After the wave of filings that started in 2015, investors really wanted to see E&P companies focus on one or just a few main things and moved away from investing in diversified E&P companies. Investors are able to diversify themselves, similar to what occurred a number of years ago when integrated oil and gas companies, such as Marathon and Conoco, spun off the midstream and downstream sectors due to discounted investors’ valuations. You now see a number of E&P companies, especially the ones that restructured, that are divesting their non-core assets and focusing their operations and asset base more narrowly.
Just in December, Linn Energy announced that it’s splitting the company into three pieces, with the goal to be very focused. They announced that they will have a SCOOP-STACK entity, an entity holding the Oklahoma pipelines, and then a third entity that basically owns the remaining assets. This new structure makes it easier for investors to invest more specifically in those assets that they want to invest in. By being that focused, I think the size of the company is going down, which makes a merger of companies with the same asset focus more likely and increases the opportunity for synergies.