Quality of assets driving distressed energy sector dynamics

Editor’s Note: This is one in a continuing series of Q&As with Locke Lord lawyers on key legal issues confronting companies engaged in industries that have national and global impact. In this Q&A, Locke Lord Houston office partners Bill Swanstrom and David Patton note winners and losers are determined primarily by two things—quality of assets, and financial flexibility.

It seems the price of oil has stabilized, moving slightly up or down rather than taking dramatic shifts. If this pattern holds, how will this impact the challenges companies will face in the next few months or for the rest of the year?

We are already seeing some of the benefits of increasing price stability. Several energy companies have accessed the equity markets and high yield debt markets in the last couple of weeks—including some companies that market speculators thought would have a tough time getting new debt and equity. This trend definitely is partially the result of less price volatility—but it also reflects a view by many companies that crude prices are not likely to increase significantly anytime soon—and so they might as well access the markets now if they can, even though they are paying a pretty high price for the financing they are receiving.

It’s worth noting that a number of analysts—certainly not all, but some—are predicting a sharp (although temporary) drop in crude prices —possibly into the 20s—before prices improve.

Even if the pricing dynamics have stabilized, there will be winners and losers in the coming months, years. What will determine who wins and who loses in this, the latest down cycle of the energy industry?

As in every cycle, the winners and losers are determined primarily by two things—quality of assets, and financial flexibility. A low commodity price environment presents a classic opportunity to see who is really wearing swim trunks when the tide goes out. Companies that have acquired quality assets at reasonable prices and with reasonable leverage will do fine. Those companies also are likely to have the best access to additional debt and equity financing—enabling them to take advantage of opportunities to buy quality assets from competitors that took on more debt than their assets could support.

Once this down cycle ends–whether it takes a few months or a year or more—what lessons should be learned from this current downturn in the price of oil?

Laws of supply and demand are called laws for a reason. More money is better than less money. But less debt is better than more debt. Quality never goes out of style.

Will the energy industry be stronger once it comes out of this down cycle or will short-term memory take over as prices climb back to the $100 per barrel mark?

Certainly some weaker players will get weeded out, and their assets will end up in the hands of better managed—or at least better financed—companies. That is generally a good thing. But we will always have cycles in the energy business. As lawyers, the best thing we can do for our clients is use our years of experience—including plenty of down-cycle experience—to help guide our clients through the rocky waters. Hopefully, with our help, they will come out stronger on the other side.

The complete Q&A Series package on “Managing Energy Sector Distress” includes the following features from Ken Simon, managing partner of the firm’s Houston office, and New Orleans Partner Rick Kuebel:

Did You Like this Article? Get All the Energy Industry News Delivered to Your Inbox

Subscribe to an email newsletter today at no cost and receive the latest news and information.

 Subscribe Now


The Time is Right for Optimum Reliability: Capital-Intensive Industries and Asset Performance Management

Imagine a plant that is no longer at risk of a random shutdown. Imagine not worrying about losing...

Going Digital: The New Normal in Oil & Gas

In this whitepaper you will learn how Keystone Engineering, ONGC, and Saipem are using software t...

Maximizing Operational Excellence

In a recent survey conducted by PennEnergy Research, 70% of surveyed energy industry professional...

Leveraging the Power of Information in the Energy Industry

Information Governance is about more than compliance. It’s about using your information to drive ...