The Russian invasion of Ukraine has seen an increased demand for oil and gas as Russia is a refined products powerhouse. Oil and Gas companies are making huge losses, opting to file for bankruptcy. Haynes and Boone, a US-based law firm noted that in 2020, over 100 firms went bust. Some of the companies include Diamond offshore drilling, Chesapeake Energy, Oasis Petroleum Inc., Peers Whiting Petroleum Corp, Noble Corp, Superior Energies Limited, and FirstEnergy Solutions Corp.
Why are the Gas Companies going Bust?
Several gas companies have gone under following increased production costs, capped prices based on consumer protection, and pulled out investors from these companies owing to poor market performance. Oil and gas companies need heavy investments to dig up wells for production. Investors look at the market performance of the company to decide on their investment portfolio. Poor market performance creates panic and an eventual withdrawal of funds by the investors. Low funds hamper operational and production costs to low production.
Some companies entered into heavy debts resulting in petitions for bailouts and/or filing for bankruptcy. Profit margins, if at all, are minimal and, many companies have sunk into debt. President Biden has termed the increased fuel costs as ‘Putin’s tax’ but gas companies were struggling as early as 2020. Companies that have been unable to attain their production targets have laid-off workers. Aggravated situations have led to the eventual liquidation and shutting down of those companies. Amidst all the companies that have gone under, FirstEnergy is such. A case study on FirstEnergy will help the reader appreciate the current market behavior of companies in the gas market and how gas companies are eventually filing for bankruptcy.
Case study of FirstEnergy Solutions Corp
On March 31, 2018, FirstEnergy Solutions and its subsidiaries filed a voluntary restructuring petition at a bankruptcy court. The company, formed in 1997 owned several coal plants, oil plants, and nuclear power plants. FES also announced the shutting down of three of its nuclear power plants.
FES’s bankruptcy petition was filed under Chapter 11 of the US Bankruptcy Code. In this arrangement, a debtor suggests a plan for continuing in business, and creditors vote on the plan. If the proposed plan is approved, then distress by creditors is stayed as the company continues with its operations. The aim of Chapter 11 is to maintain the company as a going concern. FES eventually rebranded to Energy harbor after creditors took over. Their bailout, however, was tainted with allegations of bribery. Not many companies can follow through with the plan after petitioning for bankruptcy under chapter 11. In 2020, the debt for companies that filed for bankruptcy was at a tentative $940M. Whether such huge debts accumulated only during the Covid-19 pandemic is arguable.
Effects of going under
Job losses are a natural consequence of bankruptcy. A company that can no longer meet its financial obligations is unable to pay its workers leading to massive layoffs. This reduces liquidity as the income of the workers goes down and their transactions become limited hindering rampant money circulation. Seadrill and Superior energy services Inc. are some of the companies that carried out massive layoffs owing to bankruptcy.
Underperforming financial markets are another consequence as listed companies are delisted following liquidation. Investors, mainly foreign investors are quick to withdraw in such instances thereby reducing financing. The market capitalization also becomes diminished leading to underperforming financial markets.
Proposed Way forward
Companies
Companies can seek restructuring, mergers, and acquisitions to remain going concerns. Companies that are overwhelmed with huge debts, can talk to creditors into converting the debts to equity at their companies.
The Government
The US Government should have stringent regulations for payment to top executives after bailouts. Listed companies should only issue bonuses when they are performing very well. Approving disbursements in huge tranches to the management of companies while in distress implies bad faith and poor management.
Allegations have been made, especially in former president Trump’s era that bailouts were made to companies that had contributed campaign monies. It is trite that conflict of interest declarations be made in such instances. Doing otherwise erodes investor confidence. Also, money that would otherwise be used to help ‘genuinely ailing companies’ is used to pay campaign financiers at the expense of a dwindling economy and job loss.
Conclusion
Gas companies have experienced tough economic times in the recent past. The Covid-19 pandemic made it worse leading to over 100 companies filing for bankruptcy in 2020 alone. It gets worse with political instability arising from the Russian invasion of Ukraine. However, processes following bailouts such poor corporate governance amongst the companies. An economic turnover will need genuine government intervention, company goodwill, and working diplomatic relations. We discussed the ‘The Bankruptcy Of Gas Companies; Cause And Effect’.
