Bankrupt companies often keep producing
A deep belief in commodity markets is that it will take a wave of bankruptcies to finally curb oversupply.
A Reuters analysis of bankrupt companies shows that may not even be the case.
Texas-based Magnum Hunter Resources (MHRCQ.PK), the second-largest producer among publicly-traded companies that have filed for bankruptcy, is a case in point.
It filed for creditor protection last December, but even as the debt-laden driller scrambled to avoid that outcome, its oil and gas production rose by nearly a third between mid-2014 and late 2015, filings show.
Once in Chapter 11, its CEO Gary Evans said the bankruptcy, which injected new funds to ensure it would stay operational, could help to "position Magnum Hunter as a market leader."
The company did not respond to a request for comment for this story. However, John Castellano, a restructuring specialist at Alix Partners, said that all of the nearly 3,000 wells in which Magnum Hunter owns stakes have continued operations during its bankruptcy.
They warn that bankruptcies will rise in April as banks review borrowing limits. Their analysis shows many bankrupt companies are given leeway to continue producing as they reorganize in Chapter 11.
Another reason that high prices may continue is that technology has driven amazing gains in efficiency. A well drilled late in 2015 produces twice as much as one from late 2013, Reuters reports.
The report said it could take prices between $17-23 to cause widespread shutdowns. Instead of shutdowns causing a drop in production, it may take longer until low investment results in undersupply.
Overall, this report is another reason to be bearish on crude in the medium and long term.
