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Post-Bankruptcy Activity – Cautious Emergence or Opportune Sprint?

Commodity price crashes in 2020 set the stage for several bankruptcies among producers. Emerging from bankruptcies with stronger balance sheets, many of these entities are now faced with a very different landscape today compared to when they filed for protections – particularly with WTI cresting $65/bbl this month. Today’s Energy Market Insight will explore the post-bankruptcy 2021 guidance from recently restructured E&P companies to gauge the potential impact of current commodity price strength. 

Current oil prices are raising questions about producer commitment to capital discipline amid an increasingly bullish pricing environment. Unhedged oil producers are increasingly tempted to increase activity throughout the year to capitalize on stronger pricing, but where does that leave producers that declared bankruptcy in 2020 and have emerged in the last six months?  

Ultra Petroleum and Chapparal Energy both filed for bankruptcy in 2020 for the second time, with both of their first filings occurring in 2016. Neither company emerged from their 2020 bankruptcy remaining traded as a public company, adding to their similarities. However, their commodity price exposures are quite different. While gas prices are expected to experience seasonal weakness and should dissuade Ultra’s potential for near-term activity gains, oil prices could certainly incentivize Chaparral’s activity in Oklahoma.

Whiting Petroleum spent $475MM in capital expenditures in 2019. For 2021, it plans to only spend $228MM-$252MM, a mere 50% of 2019 spending. Most of this activity will be focused in the Bakken with no mention of DJ activity planned in the 4Q 2020 earnings press release, which also provided context for free cash flow sensitivity. “Anticipating commodity price fluctuation throughout the year and considering that oil revenue represents over 90% of Whiting’s revenues, the Company expects a $1 change in WTI to impact free cash flow by approximately $10 million, subject to the effect of hedges at certain prices.” Given their free cash flow sensitivity to WTI pricing, a significant run up in WTI prices since February 24th when this capital budget was released could alter the course of 2021 spending.

Chesapeake Energy, which emerged from bankruptcy last month, announced a modest development capital budget of $650MM, which is a 70% reduction from the 2019E budget announced in February 2019. Even from 2020E’s “pre-pandemic” February guidance, 2021E capital spending is down 55%.

In addition to deep cuts in planned capital expenditures to below what is needed to sustain production, which is currently estimated at $700MM-$750MM, Chesapeake is also returning gas plays to its focus. Could strong oil prices be enough to get Chesapeake to change its tune and return capital to oil-focused plays? Over the last several years, Chesapeake made significant strides toward growing oil production to increase exposure to a commodity with greater upside potential than natural gas. Chesapeake completed the acquisition of WildHorse Resource Development in January 2019, which supported a strategy to grow oil production using cash flow from gas assets. Under the current guidance, only about $30MM is expected to be spent in Brazos Valley, the oil-rich Eastern Eagle Ford asset acquired from WildHorse Resource Development, down from $700MM-$730MM planned in 2019 for the first year of Chesapeake ownership. Similarly, the Powder River Basin had 2019E CapEx of $410MM-$430MM, which has dried up to a mere $10MM planned for 2021. Chesapeake drilled more horizontal wells in the Powder River Basin than any other operator in 2019, so the about-face means future activity will need to come from other operators. While Appalachian investment remains relatively constant through the last few years, the biggest winner under Chesapeake’s new budget is the Gulf assets. Haynesville dry gas production will be largely unphased by liquids pricing, so current oil prices will do little to impact the play’s economics.

Capital discipline was the mantra of 2019 and early 2020, but the unforeseeable commodity price volatility of the last year forced several operators to file for bankruptcy protection. Now that these producers have stronger balance sheets, will $65/bbl WTI tempt producers to hit the ground running with opportunistic timing for capital investment? BTU Analytics’ Production View and Economics View track the latest in operators’ production and breakeven economic trends. To keep up with recent developments, especially from private operators, request a trial today.

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Hamilton (Hamp) Smith is an Energy Analyst at BTU Analytics, focusing on the publication of BTU’s E&P Positioning Report and Economics View. He also oversees oil and gas production forecasting for the Rockies. Prior to joining BTU Analytics, he was a hydraulic fracturing field engineer at BJ Services. Hamp holds a B.S. in Petroleum Engineering and M.B.A. in Energy Management, both from the University of Wyoming.

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