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Good News About Oil Company Bankruptcies

Discussions about the economic and financial ramifications of PEAK OIL

Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Tue 11 Jul 2017, 16:47:20

There has been a great deal of erroneous spin tossed out about the huge number of oil patch companies filing bankruptcy. More specifically filing Chapter 11 bankruptcy. In those situations, which include the vast majority of energy industry filings, it does not mean those companies are "going out of business". But nor does it mean they are in good financial condition either. What it actually does mean is that companies, by filing Chapter 11 bankruptcy, are significantly improving their financial situation and gaining a potential to reinvigorate their activities. That will be a very difficult FACT for some here to accept.

Those running around like their hair was on fire declaring these bankruptcy filings were a death knell of the industry had it 100% ass backwards. Chapter 11 allows them to recover from the huge debt loads they took on particularly during the shale boom. It should also be noted that the majority of energy industry filings were made by service companies and not E&P companies. Also note the largest Chapter 11 filing in 2016 was an energy company but not in the fossil fuel industry. It was in the solar industry: "SunEdison's bankruptcy had been widely telegraphed, and it occurred for different reasons. A ravenous expansion run had left the company with $11.7 billion in debt through September. SunEdison no longer had the cash to pay for its debt."

Here's an oil patch update from last October:

"Fewer and fewer oil exploration and production companies are declaring bankruptcy. But more oilfield service companies are. So far this month, only one North American E&P firm filed for Chapter 11 protection, according to data released on Tuesday by the Dallas law firm Haynes & Boone. That’s down from two in September, three in August and four in July.

But it’s been an especially tough few months for service companies. As crude prices began crashing in 2014, drillers started idling rigs. That led to fewer jobs for the companies that make their money helping producers pump oil and gas. Moreover, when producers did hire service companies, they often forced them to heavily discount their rates. Eight service companies filed this month. Seven filed last month, and eight again the month before. Almost 50 have filed in the last six months, half of the 108 over two years.

In total, 213 North American oil and gas companies have now filed for bankruptcy since the start of 2015, listing more than $85 billion in debt. The most recent exploration firm: the private oil and gas company Mountain Divide, based in Montana, filed on Oct. 14, and listed $83 million in debt. On the oilfield services side, Houston-based Key Energy Services filed on Monday, with more than $1 billion in debt."

But back to understanding the POWER companies can utilize thanks the US govt bankruptcy laws. Here's a specific example of the BENEFIT a company has thanks the a Chapter 11 filing:

"A company in another state recently stated its intention to file for bankruptcy. The gas and oil company will file for Chapter 11 bankruptcy. Reportedly, it has been struggling in light of the current low energy prices. In Massachusetts and elsewhere, bankruptcy protection may be a viable solution for a company facing financial difficulties.

The company believes that filing for Chapter 11 bankruptcy will enhance its competitive position. During the past year, it has reportedly being striving to decrease its cost structure as well as enhance operating efficiencies. Reportedly, the bankruptcy filing will allow for the elimination of over $850 million in unsecured prepayment premiums, principal and accrued interest on its balance sheet. In addition, equity totaling $200 million is expected to be injected into the company to fund its development plan.

Through its bankruptcy filing, the company will also restructure its agreement regarding the purchase and sale of crude oil with another company on terms that are more favorable to the company. The company is additionally negotiating with a bank concerning the company's revolving credit facility, or variable line of credit. Finally, all working interest, royalty, customer and employee obligations will be paid in full."

Again this isn't arguing that the collapse in oil prices combined with excessive borrowing during the boom didn't do significant financial damage to the energy industry. But that huge number of bankruptcy filings, despite the claims of some armchair warriors here, doesn't represent the "death" of the industry but actually represents a rebirth. How well companies make use of this "second wind" thanks to the federal bankruptcy laws remains to be seen.

These FACTS will be difficult for some to absorb so I'll give the some time before I add some more details.
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Re: Good News About Oil Company Bankruptcies

Unread postby kublikhan » Tue 11 Jul 2017, 17:12:47

Thanks Rock. I'll take real facts vs sensationalist nonsense any day of the week.
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Re: Good News About Oil Company Bankruptcies

Unread postby coffeeguyzz » Tue 11 Jul 2017, 20:09:16

Halcon is the poster child for what you just described.

Announced today its sale of Bakken assets for $1.4 billion and is set to go balls to the wall in the Permian.
Just past fall, it entered a brief bankruptcy process and shed a lot of its legacy debt.
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Re: Good News About Oil Company Bankruptcies

Unread postby marmico » Wed 12 Jul 2017, 02:40:52

These FACTS will be difficult for some to absorb so I'll give the some time before I add some more details.


No need for time when one can access da google.

Halcón Resources Completes Restructuring and Exits Prepackaged Bankruptcy

http://investors.halconresources.com/re ... eID=988598

Essentially the common and preferred stockholders are wiped out, the lowest ranked secured creditor become a 75% common stockholder and unsecured creditors become 15% common stockholders.

The package did require a substantial DIP facility though.
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Wed 12 Jul 2017, 05:29:03

As the link Halcon shows it is much better financial shape today then it was a couple of years ago. And certain much better then being forced to sell assets on the cheap in a buyer's market. That's is the great benefit of a "debtor-in-possession" restructuring then being forced to liquidate PROVED PRODUCING reserves. And how much better financial condition in the company and the new owners? From the link:

"Approximately $1.8 billion of the Company's debt has been eliminated under the Restructuring Plan along with more than $200 million of annual interest expense going forward."

IOW Halcon does not go out of business but has new owners: pre-petition holders of Halcón common stock are receiving 4.0% of the common stock of the reorganized Company and the remaining 96.0% of common stock is being allocated to pre-petition debt holders in the Company. And what capex will the reorganized Halcon have going forward: Halcón's $600 million debtor-in-possession credit facility was converted into a $600 million reserve-based senior revolving credit facility. The first borrowing base redetermination is scheduled for May of 2017.

IOW in addition to shedding a sh*t load of debt it now has a $600 credit line based on its reserves. Which would increase should oil/NG prices increase. One thing is certainly indisputable: Halcon is certainly not "going out of business" but in fact is a financially strong company with the ability to use its borrowing base to expand its activities. How well will it handle its "new life"? Time will tell. But one of its best uses of some of that $600 million credit line may be buying assets that are being forced to liquidate on the cheap as a result of other Chapter 11 filings: Quicksilver Resources filed Chapter 11 with $2.1 billion in debt. Its assets, in the Barnett shale and west Texas, eventually sold for just $245 million in cash. Dune Energy only got $20 million for its oil and gas fields in Texas and Louisiana, against $144 million in debt. BPZ Resources, which operates in Peru had $275 million in debt; its assets sold for only $9 million.

As mentioned before, we are perhaps in the middle of the greatest fossil fuel wealth transfer in history. Companies are acquiring PROVED PRODUCING reserves at a lower cost then they were able to develop by risky drilling efforts just a few years ago. This does not represent a "dying industry" but one growing based on CURRENT oil/NG prices. There has certainly been some major financial losers in the process: some shareholders but primarily unsecured bond holders. But many of the companies overall are in much better condition thanks to filing bankruptcy.

And the rest of the industry that hasn't filed bankruptcy? It's been repeated reported here that the industry has accrued $1 TRILLION in debt. So far the total amount of debt held by the more then 200 companies filing Chapter 11 bankruptcy is less then $100 billion. I've yet to see DOCUMENTED proof of the $1 TRILLION number but let's accept it as valid. This would indicate that companies holding 90%+ of that $1 TRILLION of debt are able to not only service it but are also able to carry on business since they haven't had to resort to filing bankruptcy.

Have no doubt: the oil price collapse did great financial damage to the industry. But it is far from "dead". In fact, thanks to federal bankruptcy laws, the financial condition of hundreds of companies (but not all the bond and share holders) has greatly improved.
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Wed 12 Jul 2017, 05:38:38

And if curious here are the 15 largest Chapter 11 filings as of May 2016. Since then not many E&P companies have filed: it's been mostly service companies. Notice the list does not include many of the well known shale players:

Pacific Exploration & Production -- $5.3 billion in debt

Samson Resources -- $4.3 billion

Ultra Petroleum -- $3.9 billion

Sabine Oil & Gas -- $2.9 billion

Energy XXI -- $2.8 billion

Quicksilver Resources -- $2.1 billion

Midstates Petroleum -- $2 billion

Venoco -- $1.3 billion

Swift Energy -- $1.2 billion

Energy & Exploration Partners -- $1.2 billion

Magnum Hunter Resources -- $1.1 billion

Milagro Oil & Gas -- $1 billion

New Gulf Resources -- $600 million

Goodrich Petroleum -- $500 million

ERG Resources -- $400 million
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Wed 12 Jul 2017, 05:55:43

And then there's the interesting collateral damage from lower fossil fuel prices as well as competition from China: the solar industry bankruptcies are replacing the oil patch bankruptcies in the head lines. From:

https://www.fool.com/investing/2017/04/ ... ing-in.asp

"Aleady, 2017 has been a big year for solar bankruptcies. Residential solar company Sungevity and commercial solar supplier Beamreach have both filed for bankruptcy, following a year when Verengo Solar and SunEdison went under. And Yingli Green Energy, formerly a world leader on solar panel volume, just lost $267.1 million in the fourth quarter of 2016 on $294.0 million in revenue, so its days in its current form are likely numbered."

One in particular with respect to govts picking "winners and losers": Largest US Solar Panel Maker Files For Bankruptcy After Receiving $206 Million In Subsidies

http://dailycaller.com/2017/05/11/large ... subsidies/

"The filing comes after SolarWorld was forced to lay off employees earlier this year. The company employs around 3,000 people, including 800 in Hillsboro, Oregon, and was one of the few German-based solar companies to survive a recent market downturn. SolarWorld is only the latest bankrupt solar company to blame the Chinese. U.S.-based Suniva Inc. filed for bankruptcy in April, also citing stiff competition from Chinese solar panel makers.

Suniva even asked the Trump administration to increase tariffs against Chinese solar panel imports. SolarWorld backed the call, saying China has found ways to circumvent current tariffs."
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Wed 12 Jul 2017, 09:40:10

And what if an oil company is in such deep sh*t it can't be salvaged by a Chapter 11 restructuring? Then it's time for Chapter 7 bankruptcy: total liquidation.

A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 11 or 13. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code.

But even in the case of a Chapter 7 bankruptcy filing
the company doesn't necessarily disappear: they may have little or no assets but they have no debt either. They can still raise money from a variety of sources if they have a good enough story to tell. I once consulted for a company that did just that: went thru Chapter 7 (burning me for $11,000 in consulting fees) and then raised tens of $millions for a variety of projects including a big one in Colombia. BTW the SEC eventually charged them with fraud involving the Colombia project. I eventually learned they were crooks when I worked for them so the SEC charges didn't surprise me.

The leopard can't change his spots. LOL.
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Wed 12 Jul 2017, 09:57:30

And a Chapter 11 restructuring is by no means a straightforward process: often the NEGOTIATIONS can get very nasty and take years. From:

https://www.law360.com/articles/878266/ ... 1-plan-war

"The major players in the Samson Resources Corp. bankruptcy said Friday they'd come to a deal that aims to end the fierce squabbling in the oil and gas company's Chapter 11 case to restructure some $4 billion in debt, and sets out to pay unsecured creditors at least $168.5 million.

In a notice filed with the Delaware bankruptcy court, Samson, its first- and second-lien secured creditors and the official committee of unsecured creditors said they are going to ask U.S. Bankruptcy Judge Christopher S. Sontchi to approve the global settlement, which contemplates a reorganization strategy retaining the second-lien lender debt-for-equity swap, at a hearing scheduled for Jan. 11."

Also note that Samson did not dig themselves into a hole drilling the shale plays:

"Much of the debt stemmed from Samson's leveraged buyout from the founding Schusterman family in 2011, led by Kohlberg Kravis Roberts & Co. LP affiliates and investors Crestview Partners, Itochu Corp. and Natural Gas Partners, according to court records."
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Re: Good News About Oil Company Bankruptcies

Unread postby coffeeguyzz » Wed 12 Jul 2017, 10:08:47

And in somewhat related news ...

Part of the quid pro quo for allowing exports of us crude, lawmakers extended until 2020 the various tax credits for wind and solar endeavors.
Warren Buffet, one of the bigger suppliers of US wind energy, is on record saying wind power makes NO economic sense but for the tax credits.

So ... Hong Kong just eliminated the tax credit for owning Tesla cars.
Quarterly sales went from 3,000 to ZERO.

Absent change, the US solar and wind industries will be sucking wind (pun intended) with a looming potential legacy nightmare in a few years time.
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Wed 12 Jul 2017, 12:59:49

Coffee - "Part of the quid pro quo for allowing exports of us crude, lawmakers extended until 2020 the various tax credits for wind and solar endeavors." Which has to make you wonder if that was all propaganda or if some of those Congress critters really believed there has ever been an effective ban on exporting US oil.
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Re: Good News About Oil Company Bankruptcies

Unread postby coffeeguyzz » Wed 12 Jul 2017, 14:24:13

Rock

Politicians never lie.

They told me do.
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Re: Good News About Oil Company Bankruptcies

Unread postby tita » Wed 12 Jul 2017, 15:19:38

So what? Companies may burn investors and equity money, not generate enough cash to repay interests/debt... But they have enough projects/future cash generating plans to repay some of their debt. So, they go through a financial rejuvenating cure (chapter 11) to get fit and able to invest, and make another round of cash burning until some miracle (100$ oil barrel?) happens and turn their operations into profits. So, here we are... everybody drill again, production grow again and everybody's happy?

But, Rockman, would you buy any of these "cheap" assets of proved reserve in the LTO fields?
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Wed 12 Jul 2017, 16:34:30

tita - "But, Rockman, would you buy any of these "cheap" assets of proved reserve in the LTO fields?"

Hell yes! LOL. That's what I've been busting my ass 60+ hours a week trying to do with our $200 million acquisition budget. But not shale wells or undrilled leases. Those wells have too little life left. As far as undrilled leases: we didn't drill shale wells when oil was $90/bbl so why would we drill them now?

Conventional fields are selling for a premium especially if they have significant inside redevelopment opportunities. The competition is very tough: lots of fund $'s out there willing to pay too much. So we've funded a group of conventional prospect generators and will try to drill up some new reserves.

But if you can buy PROVED PRODUCING reserves in shale wells at a price that you can recover 100% of your investment in 3 years or less and make a 10% - 15% ROR? Many public companies find that very attractive. Especially if they already own similar production that they spent significantly more to drill up. The term is "averaging down" your costs: a common goal of many pubcos.

Companies are paying $12 to $18 per bbl of PROVED PRODUCING reserves. IOW they'll make a guaranteed profit if oil sells for $40/bbl well into the future. What problem do you have with that?

And as I pointed out: "not generate enough cash to repay interests/debt". More then 90% of the $1 TRILLION in debt the industry has supposedly been accrued is not only being serviced but companies have sufficient capex to carry on business. Otherwise those companies would be taking advantage of the Chapter 11 safe harbor.
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Wed 12 Jul 2017, 21:16:21

And then there's the power to just threaten to file Chapter 11 bankruptcy that can help a company shed some of its debt without filing bankruptcy. From Sept 2016:

"Comstock now owes about $1.2 billion, according to Debtwire’s list, due in 2019 and 2020. The company has asked bond holders to defer interest until Comstock has repaid the notes, said Tim Hynes, head of research at Debtwire. If bond holders don’t approve the request, Comstock will file for bankruptcy, he said.

UPDATE: Comstock completed the debt exchange {swapped stock for some of its debt}, which lowers its interest expenses by about $37 million a year. If Comstock shares reach $12.32 — they stand now at just over $7 — for 15 days in a row, the deal would eliminate roughly $460 million in long-term debt, leaving the company with about 60 percent of its original debt. Gary Guyton, Comstock’s director of planning and investor relations, said the company is putting one rig back to work imminently and another this winter. He said Comstock expects a 35 to 40 percent production growth next year."

The goal of this thread was to explain how the ability to file Chapter 11 under US bankruptcy law is not a negative but a powerful tool to improve the financial condition of companies that borrowed excessively during the boom and then struggled to cope with the oil price collapse. Yes: filing bankruptcy is a sign of financial distress. But it is also a mechanism to improve the survivability of those companies and not an indication of near death.
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Re: Good News About Oil Company Bankruptcies

Unread postby ralfy » Wed 12 Jul 2017, 21:28:36

They can only "reinvigorate their activities" in the long run through cheap oil. Peak oil does not allow for that.

That's also why the next four decades will likely not be the same as the last four.
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Re: Good News About Oil Company Bankruptcies

Unread postby tita » Thu 13 Jul 2017, 01:58:12

What problem do you have with that?

I don't have problem with companies making profits. I'm quite sure that majors (Exxon, Chevron) going into shale don't do it to lose money. I don't have problems with companies financing their capex through debt when it can be serviced, and not shed through chapter 11 or direct negociation. And even that is not a problem if it leads to a sustainable finance and operations in the end.

My concern is the production profiles of shale oil. A high initial output may appear like a bonanza, and fuel a hype around shale production which attract easily investing money desperate to find a place to generate interests. Huge pile of investing money made possible with the various QE in US (2010-2014) or Europe (2015-currently). And as long as the growth is there, the money flows. Until, of course, growth can't be sustained.

But my concerns may be wrong. It's not that I'm certain that there is a problem here. It's just that I'm a bit suspicious. Everything that shines is no gold. And shale shines through stories telling how revolutionary it is, how low they costs now, how big are the reserves, how it will make America energy independant.
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Thu 13 Jul 2017, 06:48:33

tita - "My concern is the production profiles of shale oil." Rightfully so. As I pointed out the individual shale wells don't offer a production profile adequate for the Rockman's PRIVATELY owned company. But while folks point out the dubious profitability of the shale production they ignore the huge profit component made by pubcos: the profit made by the early shareholders. In the early days the Rockman repeatedly explained that this was THE primary driving force behind the shale boom and not the individual well economics.

EVERYONE ELSE: LOOK AT THE FOLLOWING TO UNDERSTAND THE CHANGING VALUES OF THE PUBLIC COMPANIES IN THE OIL & NG SEGMENT OF US INDUSTRIES:

I don't want to double post the following FACTS in the shale profitability thread.

The market cap (the value of the stocks of the pubcos) increased more then 4X its value of the petroleum sector from 2003 to the peak in 2014. IOW an increase in value of more the $6 TRILLION!

https://markets.ft.com/data/sectors/Oil-and-Gas

The pubcos use of the shale plays was greatly successful in their primary goal...that cannot be denied. Some rant about a $1 TRILLION debt (still undocumented) accrued by the industry. But considering the net gain of more then $5 TRILLION that looks like a huge profit. But, of course, only if you sold at the right time. But isn't that the case of every boom be it dot.com, real estate, etc? Isn't that the very definition of a boom: an unsustainable growth profile?

Even after the collapse of the market cap the industry is still currently worth $5.3 TRILLION compared to the low of $3.5 TRILLION just 8 years ago in early 2009. A net gain of almost $2 TRILLION. Of course the stagnated to declining oil price has been eating into that "profit" for a number of months and the trend doesn't look good. Of course in the world of pubco investing such dynamics can be described as a "buying opportunity". Look at the huge surge in the recent trading volume at the bottom of that chart. Yes: a lot of stock being sold as oil prices stagnated/declined. But for every seller there was a buyer with different expectations.

Just a question of having the balls to make that move. LOL. But if one had the nerve to sink their life savings into Chevron in Sept 2015 when it was selling for $76/share and then sold just 15 months later in Dec 2016 for $118/share one could have increased their retirement nest egg more then 50%. You don't make such great a great rate of return without taking a significant risk.

Who said you can't make a lot of money these days by investing in oil companies? All you have to do is get the timing right...just like investing in any other industry. LOL.

It is amazing though, isn't it? Even after suffering a more the 50% decrease in oil prices the oil patch pubcos collectively are worth about $700 BILLION more today then they were just 2 years ago when they reached a recent low. And still $1.2 TRILLION more then before the shale plays took off.

Not exactly the "near death of the industry" some around here have been pitching, is it? At least not with respect to the value of the US public traded companies.
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Re: Good News About Oil Company Bankruptcies

Unread postby rockdoc123 » Thu 13 Jul 2017, 10:13:13

Not exactly the "near death of the industry" some around here have been pitching, is it? At least not with respect to the value of the US public traded companies.


as I have said before it is a complete lack of understanding of many people as to how oil and gas companies valuations are done by investment banks. It is the investment banks that drive the financial planners and brokers who are recommending to the individual investor what is or is not a good investment. Unlike other industries where it is extremely important to look at net profits as a measure of success the important things to look at in terms of oil and gas E&P companies are things like Debt/Equity ratio, EBITDA, cashflow from operations, NPV(10) of 1P and 2P reserves, measures of market cap/share, enterprise value/share, recycle ratio, reserve life and F&D costs. They do not expect to see a net profit year on year but rather want to see as much cashflow as possible reinvested as CAPEX that can drive growth (i.e. more wells, pipelines, plants, acquisitions etc). If companies can grow at the same time as provide dividends then that is even better, but to most financial analysts growth is the preference unless a company is continuing to increase it's dividend year on year.
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Re: Good News About Oil Company Bankruptcies

Unread postby ROCKMAN » Thu 13 Jul 2017, 13:07:01

Doc - Good points. But: "Unlike other industries where it is extremely important to look at net profits as a measure of success..." There are other exceptions even more extreme: I'm always amazed at dot.coms and alt energies that have market caps in the $billions, if not tens of $billions, that have yet to generate a single $ of net profit. But that's how the stock market has functioned for decades: expectation driven.

The other dynamic some refuse to acknowledge: Company A might have spent $1 billion to drill shale wells. But thanks to poor location selection and the oil price crash those wells will only net the company $800 million. But thanks to filing Chapter 11 the company was able to flush $400 million of the bond debt it used to drill those wells. While the current price of oil leaves the company few (or even no) drilling opportunities it is still generating a reasonable net income because the wells are still generating a significant net cash flow since the LOE (production costs) is significantly less the the current oil price. As I pointed out about Halcon: the corporation (though ownership has changed hands) is in great shape after Chapter 11 reorganization: eliminated $1.2 billion in debt and has a reserve based line of credit of $600 million.

Which was the primary point I wanted to make with this post: the 200+ bankruptcy filings was not bad news. In fact good news as companies used the rather generous federal bankruptcy laws to make up for some of their past sins.
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