60 oil and gas producers have already filed for bankruptcy and another 150 oil and gas companies are headed that way, according to Colorado-based, US energy consultant IHS Inc.
Thanks to record low oil and gas prices – Brent Crude last traded at around US$31.03 a barrel – those 150 companies are at high risk of going bust, as a global supply glut continues to show no sign of letting up.
Oil prices have fallen around 70% over the past two years as US shale oil producers boosted output while the Organisation of Petroleum Exporting Countries (OPEC) continued to gradually increase its own production. In what appears to be a game of chicken, the first to blink loses.
So far 60 oil and gas companies have blinked and hit the wall in the US, and an estimated US$230 billion worth of oil and gas assets are currently up for sale according to HIS chief upstream analyst Bob Fryklund.
Mr Fryklund has told Bloomberg that nobody is buying because buyers and sellers have disagreed on asset values, leaving sellers with no option but to file for bankruptcy. He says once we see more bankruptcies, buyers will become more active – which might signal the bottom of the oil price fall.
According to the US Energy Information Administration (EIA), US production is forecast to drop by 620,000 barrels a day, or around 7% between the first quarter of the year to the fourth quarter. But if prices recover to around US$45 a barrel, drillers may begin increasing output again, says Mr Fryklund.
Some Australian oil and gas producers could also hit the wall unless they can drastically slash their costs.
One company at high risk is Santos Ltd (ASX: STO). The oil and gas producer has said that it will be cash flow positive from 2016 with oil prices at US$50 a barrel and the Australian dollar at 70 US cents.
Oil prices are now 38% lower and the Australian dollar is trading at around US 70.6 cents. Clearly, Santos is running at a huge loss currently and with its mountain of debt, is rapidly running out of options. It's no wonder the Santos share price is down 5.6% at $2.89 in late afternoon trading.
Foolish takeaway
It shouldn't come as a surprise if we see a number of ASX-listed oil and gas companies fall into administration, given what is happening in the US already. The other problem is which companies will they drag down with them? Their bankers and support services companies look mighty vulnerable.
Buyer beware.
