Surprise U.S. Drilling Slowdown Triggers Largest Oil Bankruptcy in Years

Weatherford International

It might be hard to believe as stories about America’s growing production output continue to make headlines, but a recent slowdown in U.S. drilling activity has resulted in what’s become the largest oil and gas bankruptcy to move the markets in years.

Swiss-based Weatherford International (OTC: WFTIF) filed for bankruptcy protection on Monday after bondholders agreed on a restructuring agreement that would cut its total debt down by around $6 billion, or roughly 70 percent.

The company at its height was worth over $12 billion five years ago, but shareholders will end up receiving almost nothing should the restructuring agreement receive approval. Unfortunately for them, there seems to be little other choices for the oil and gas company, which has struggled to curb spending and reduce costs in recent years.

“The decline in the price of oil and gas and the resulting adverse market conditions have severely impacted Weatherford affecting, among other things, the company’s cash flow, borrowing capacity, and ability to service its outstanding indebtedness,” the disclosure statement goes on to mention. “As with many of their peers, this drastic and prolonged drop in oil and gas prices has strained the company’s liquidity for an extended period of time. “The company took several steps to try to address its capital structure and liquidity needs without a comprehensive in-court restructuring before commencing these Chapter 11 cases. The company and its management team focused on cutting costs, reducing capital expenditure, and managing liquidity.”

It might be a strange thing to hear of an American oil company going bankrupt but it shouldn’t be surprising when everything is considered. Shale companies, in particular, are under pressure from investors to operate within their budgets after failing to do so for years. Even with crude prices climbing back to $60 per barrel, the fiscal restraint imposed by shareholders has ended up weighing heavily on the oil-field service segment, which is the industry’s largest employee as well as the first to be hit when the energy sector turns sour.

These shale companies have been cutting back activity levels while demanding price reductions from the service companies they use to drill and frack wells. As such, service companies are in a terrible state. One anonymous source that reported to The Wall Street Journal went on to say that the current price levels paid to service companies can’t “continue much longer before something cracks: quality, reliability, safety, etc.”

Weatherford has struggled with its debt issue for years, having failed to report any profit since 2011, despite laying off over 40,000 employees since 2013. First founded in 1941, Weatherford became among the top four oil-field service companies in terms of market cap thanks to a number of acquisitions it made in the 1990s. Since then, the company has become saddled with a total debt that’s over 12 times its earnings.

While it’s not a story that most have heard before, the bankruptcy of Weatherford underlies a potential vulnerability in the American oil-and-gas sector as these service providers which are essential to operations could all face a crisis in the months and years to come.