Extraction Oil nears possible bankruptcy filing

Extraction Oil & Gas, which surged 300 per cent on the stock exchange earlier this week, is likely to file for bankruptcy imminently, according to people familiar with the matter, the latest casualty of an oil price crash ravaging the US shale patch.

The Denver-based producer’s market worth has collapsed from $4bn in 2016 to less than $100m on Friday, while its total debt outstanding amounted to $1.6bn at the end of the first quarter.

It is nearing the end of a grace period after skipping a $14.8m interest payment last month, and may file for Chapter 11 bankruptcy protection before the deadline to pay the debt on June 14, the people said.

Bond markets are pricing in the company’s restructuring, with a note maturing in 2024 trading for just 13 cents on the dollar.

If it does file for bankruptcy, Extraction would become the second big shale producer to be forced into a restructuring during the latest oil-price crash, following Whiting Petroleum’s Chapter 11 filing on April 1. Others, including Chesapeake Energy, with its $23bn in debt, are also close.

$6.7m Cost to EOG of retention agreements with 16 directors

Analysts expect a wave of bankruptcies to sweep across the sector in the coming months as the downturn hits producers already struggling under heavy debt loads. A host of smaller groups have already succumbed, according to law firm Haynes & Boone, with 18 filing for protection as of the end of May.

On Thursday, Extraction announced it would pay 16 of its directors a combined $6.7m in “retention agreements” to keep them with the company. The move was seen as a precursor to imminent bankruptcy and sparked anger among investors and recently fired ex-employees.

The executive payout capped a volatile week for the shale operator. Its share price quadrupled on Monday to $1.70 apiece as retail investors hunted stock of near-bankrupt companies. The shares crashed back below 60 cents by Thursday’s close and were trading at around 65 cents on Friday.

Extraction warned investors in May that it was “probable” it would breach its covenants for the second quarter, triggering a series of defaults and creating “substantial doubt” over its ability to continue as a going concern.

The company said it had engaged advisers to assess “strategic alternatives” that might include a Chapter 11 restructuring.

Extraction has hired Moelis & Co, a bank, Alvarez & Marsal, a consultancy, and law firm Kirkland & Ellis to help with its restructuring. Moelis declined to comment. Extraction, Alvarez & Marsal and Kirkland & Ellis did not respond to requests for comment.

Some investors criticised Extraction’s decision to plough cash into its own pipeline business and buy back shares, saying the weakened balance sheet left it vulnerable in the worst oil-price crash in decades.

Analysts said the group had relied too heavily on its credit revolver and been unable to cut capital spending because production from fast-declining shale wells would fall steeply.

“They’re damned if they do cut spending — production and cash flow would fall precipitously — and damned if they don’t — they’ll burn through the limited liquidity they have,” said John Thieroff, senior analyst at Moody’s Investors Service.

Extraction, which was founded in 2012 as the shale oil boom began, produced 94,000 barrels of oil and gas equivalent a day in the first quarter from Colorado’s DJ Basin. Its market value peaked at just over $4bn shortly after it listed in a bumper IPO in 2016, in the wake of the last downturn.

US crude prices were trading at $36 a barrel on Friday, about 40 per cent down on their year high in January. In April, the US oil benchmark briefly traded below zero, triggering panic in the American energy sector.

Yorktown Partners, a private equity company, holds about 36 per cent of the company’s common shares, while hedge fund Luminus Management also holds a large position. Neither responded to requests for comment.