The recent drop in oil prices will likely spur a flurry of industry restructurings, governed by a complex set of bankruptcy and state laws.

Introduction -

At the close of business on December 31, 2014, the price of West Texas Intermediate crude oil was US$53.27 per barrel — an approximate 50 percent decline from the price of US$105.24 at June 30, 2014. Natural gas has faced a similar decline, falling approximately 36 percent over the same period. This steep decline in commodity prices is already reflected in the trading prices of many exploration and production (E&P) companies’ debt securities. In December 2014, E&P company high yield debt rated BB was generally off 15 to 20 points since the summer peak, and the broader B/CCC rated E&P high yield debt universe was off more than 30 points since the summer peak. Some of these companies are also facing bond maturities in 2015 and 2016, while others may be required to reduce capital expenditures at the expense of longer term cash flows. If commodity prices settle at or near today’s prices, several companies in the upstream segment of the market very likely will face significant liquidity crises, while others may require a more comprehensive financial restructuring.

The current downturn is a reminder that oil and gas exploration and production has always been a cyclical business. Memories of the last downturn in the sector may have faded but investors should keep in mind some of the unique industry and legal issues involved in oil and gas finance.