Reuters recently reported that more than 50 North American oil and gas producers have entered bankruptcy since early 2015.  Moreover, Deloitte has opined that as many as one third of all shale producers face potential bankruptcies this year.

All of this should signal decreased domestic production, right?  The counter-intuitive answer is not really.

As Swetha Gopinath and Joshua Schneyer noted on Reuters online this morning, "bankruptcies are so far having little effect on U.S. oil production, and a tendency among distressed drillers to keep their oil wells gushing belies the notion that deepening financial distress will prompt a sudden output decline or oil price rebound."

The authors point to Magnum Hunter, which filed for bankruptcy protection in December, as a case in point.  Rather than curtailing production post-bankruptcy, "all of the nearly 3,000 wells in which Magnum Hunter owns stakes have continued operations during its bankruptcy."

And Magnum is not alone.  The Reuters article notes that "restructuring specialists say that many bankrupt drillers keep pumping oil at full tilt. Their creditors see that as the best way to recover some of what they are owed. And as many bankrupt firms seek to sell assets, operating wells are valued more than idled ones. "Many bankrupt firms can sustain their output thanks to so-called debtor-in-possession (DIP) financing for operating and other expenses made available by existing creditors, banks, or private equity firms....Many distressed producers have also drawn down their credit facilities or skipped bond payments prior to filing to conserve cash."

The lack of diminished production from bankrupt operators is yet another reason why prices have moderated only slightly as the supply-demand imbalance is only slowly correcting.

There is some reason for optimism going forward.  Even though bankrupt and financially distressed companies are continuing to operate their wells, what those companies "are unable to do is drill new wells and since output from shale wells can fall as much as 70 percent during their first year, a sustained lull in drilling would gradually erode U.S. production."  As a result, the Reuters authors note, "[u]ltimately, the number of bankruptcies may matter less than the lack of funding. The lending reviews now underway are likely to leave more companies without sufficient credit to finance new drilling, ...."

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