Gardere Partner John P. Melko, chair of the Firm's Financial Restructuring and Reorganization Practice Group, authored an article for the February edition of the Oil & Gas Financial Journal on the effects that decreasing oil prices has on the energy industry.
"We are in the midst of year end audits, which means that 'earnings season' will soon be here, along with the required new reservoir reserve reports. Those reports will cause many borrowers with reserve-based loans to be in default of loan covenants," Mr. Melko wrote. "Even the better capitalized producers will be staring at capital budgets which have not changed in costs, but which will bring in lower revenues because of price drops, and thus drilling projects will be deferred. Because of the cancellation or deferral of those projects, oilfield service companies have already cut back staff, meaning that many experienced and previously high earning workers are newly unemployed."
According to Mr. Melko, while we are in for "a wild ride," this isn't anything that the oilfield hasn't seen before and there are things that producers, service companies and lenders in the United States should do to protect themselves.
The complete article can be found here.