Bankruptcy, Successful Spinoffs, And New Regulations Wrap Up Week's Energy News

Mar 25, 2016

It’s been more than 18 months since the start of the energy downturn that saw the price of oil dip to about $30 dollars a barrel.

It’s slowly starting to rebound, and it’s led to bankruptcies, a few success stories, and even some variables that have nothing to do with market forces.

Last week New Source Energy Partners filed for Chapter 7 bankruptcy. The small company based in an office along Broadway in Oklahoma City’s Automobile Alley had a credit cut in October that took its borrowing base from $49 million to $24 million.

“Then a month later their CEO said that they wouldn't have the cash or the collateral to cover their payments,” said The Journal Record’s managing editor Adam Brooks. “They're also facing a lawsuit from their drilling contractor, New Dominion. So it was really no surprise.”

University of Tulsa economist Tom Seng says there were signs New Source was in trouble, according to The Journal Record’s Sarah Terry-Cobo:

The company had a negative debt-to-equity ratio for its third-quarter earnings, the most recent available. The company’s liabilities were $227 million and its total unit holders deficit was $20.9 million.

A high debt-to-equity ratio doesn’t necessarily mean a company will become insolvent, but it is an indication of its financial health, Seng said.

“The company filed for Chapter 7 bankruptcy, which is interesting,” Brooks said. “That's not a reorganization. They're looking to liquidate the company.”

Commission Clarification

The Oklahoma Corporation Commission unanimously voted Tuesday to approve new rules specifying how agency staff and disposal well operators will settle disputes over regulatory actions issued to reduce earthquakes.

Nearly all operators have voluntarily complied with earthquake-related regulatory actions issued by commission staff, known as directives. But SandRidge Energy in December 2015 refused for weeks “to shut down six wells and reduce wastewater volumes in 50 others in northern Oklahoma,” prompting staff to threaten legal action, The Journal Record’s Sarah Terry-Cobo reports:

New rules state the operator or staff must request a technical conference within five days of the agency issuing a directive. If neither party requests a conference, then the operator must shut down the well.

The Legislature must approve the proposed rule changes with an all-or-nothing vote, which often happens in May. The governor must also agree to adopt the rule changes.

“Eventually everyone agreed to a technical conference,” Brooks said. “Terry Stowers of the Coalition for Surface and [Mineral] Owners wants to make sure that both sides can call for a technical conference, and he wants clarification on when injections can resume after the conference.”

American Energy Partners’ headquarters in Oklahoma City. Its affiliate company, Permian Resources LLC, announced Wednesday its separation from American Energy to become a stand-alone company.
Credit Brent Fuchs / The Journal Record

Subsidiary Success

American Energy Partners spun off its operation in the Permian Basin of west Texas on Wednesday. That move itself is fairly unremarkable, but it is a sign of success in an industry, Terry-Cobo writes.

“They were a platform. They would build assets and funding, and then separate,” Brooks said. “There [have] been some reports that AEP was losing investor confidence, but you could see these spin-offs as a sign that the model is working.”

Until his unexpected death in March, AEP was led by Aubrey McClendon.

"It's kind interesting because Jeff Fisher, who's the CEO of [2015 AEP spinoff] Ascent, and Jeff Mobley, the CEO of Permian Resources - they were both high-level executives under Aubrey McClendon at Chesapeake Energy,” Brooks said. “So this is sort-of his bench coming up, stepping into their own.”

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