As the COVID-19 global pandemic has prompted a dramatic collapse in energy demand, the fossil fuel industry has hit its highest number of bankruptcies in history. Many attribute the increase in bankruptcies solely to COVID-19. However, fossil fuel bankruptcies have been on the rise for years and COVID-19 is not entirely to blame for the industry’s financial failures of the past decade. Within the North American oil and gas industry alone, from 2015 to 2019, there have been more than 500 bankruptcies, totaling close to $220 billion in aggregate debt.
Figure 1: Oil and Gas Aggregate Debt
From 2017 to 2020, the amount of aggregate debt filed in oil and gas bankruptcies has nearly doubled each year — a trend expected to continue into 2021. Bankruptcies are not limited to small, mismanaged wildcatters. As the data shows, bankruptcies in the oil and gas industry are
Figure 2: Oil & Gas Yearly Bankruptcies
widespread across small, medium, and large companies, from filings totaling a few hundred thousand to filings totaling billions of dollars. Furthermore, bankruptcies are widespread across oil and gas producers, oilfield service and midstream companies. Interestingly, of the oil and gas companies that declared bankruptcy in 2018, 67% were exploration and production companies. Yet, despite poor returns and risk of bankruptcy, creditors continue to finance the oil and gas industry’s exploration and expansion to meet non-existent demand.
Although CalPERS is required by SB964 to assess climate-related financial risk and act according to its fiduciary duty, the CalPERS portfolio remains heavily invested in the bankruptcy-ridden oil and gas industry. Not surprisingly, CalPERS has experienced multiple oil and gas bankruptcies within its portfolio over the years. What is surprising (because it seems financially irresponsible) is the continued investment in oil and gas public equities despite years of indications that the industry is facing high bankruptcy risk.
Within the CalPERs 2018 Portfolio, there were multiple oil and gas companies that declared bankruptcy including: Exco Resources Inc (EXCE), Erin Energy Corp (ERINQ), and Parker Drilling (PKDC).
Figure 3: The Demise of Three Oil Companies in CalPERS Portfolio
Erin Energy Corporation, formerly known as CAMAC Energy, is an independent oil and gas exploration and production company with its main operations focused in Africa. Erin Energy Corporation filed a Chapter 11 Bankruptcy in April 2018 for $391,241,852 in aggregate debt. Since Erin Energy Corp filed for bankruptcy in 2018, the company has not recovered its stock price nor improved its financial standings. On the day of its bankruptcy filing, Erin Energy Corporation’s stock dropped from $3.25 to $0.17 and has hovered at $0.0017 for the past two years and a half.
Also in 2018, Parker Drilling Company, a global drilling and oil well services company founded in 1934, filed for bankruptcy with $695,490,000 in aggregate debt. Since Parker Drilling Company filed for bankruptcy in December 2018, the company has not been able to recover its stock price from its early 2000s range of $60 to $120 per share. In fact, ever since 1980, the company’s share price has been gradually decreasing over time, hitting new lows each decade. Now, Parker Drilling’s share price hovers at $2.90.
Exco Resources, an oil and natural gas company whose primary operations are in North America, filed for bankruptcy in January 2018 for $3,045,414,384 in aggregate debt. Its stock price has hovered at $1.00 for the past two years since its 2018 bankruptcy. Furthermore, even prior to Exco’s bankruptcy filing, the company’s stock price steadily decreased from about $80 per share in June of 2012 to single numbers.
Perhaps more notable, there are 14 oil and gas companies that previously declared bankruptcy from 2015-2018 that are still within the CalPERS 2018 portfolio. Many of these companies’ share prices have not recovered. In particular, Ultra Petroleum and Chaparral Energy declared bankruptcy in 2016 and again declared bankruptcy in 2020. It is a breach of fiduciary duty to continue to invest in companies that promise financial loss and continue to show no upward trajectory.
Oil and gas bankruptcies continued to rise in 2019. According to Haynes and Boone, a total of 63 oil and gas companies filed for bankruptcy in 2019, a 26% increase from 2018. Unsurprisingly, CalPERS’ 2019 Portfolio was not immune to the industry’s rampant financial failings and had multiple bankruptcies within its fossil fuel holdings including: Weatherford International PLC, Sanchez Energy, and Legacy Reserves Inc.
Weatherford International PLC, filed for bankruptcy in June 2019 with aggregate debt at $10.6 billion. Founded in 1940, Weatherford is one of the largest oil and gas companies in the world with more than 30,000 employees operating in more than 100 countries. The company never recovered from the 2014 oil price collapse and did not report a quarterly profit for four years, from 2014 to 2018. Though Weatherford International eliminated $6.2 billion of outstanding funded debt from restructuring, the company is facing a “Chapter 22” (Chapter 11 bankruptcy for the second time) bankruptcy in 2020, months after emerging from its 2019 bankruptcy. Weatherford International once had extremely high share prices ranging from $65,000 in June 2008 to $30,000 in January 2014. Since 2014, however, the company’s stock has steadily declined until now, when its share price is at $2 a share.
Similar to the Calpers 2018 Portfolio, the 2019 Portfolio holds more than 24 companies that had previously declared bankruptcy within the past five years. Many of these companies have not recovered their stock price and are underperforming when compared to the S&P 500.
Figure 4: More Bankrupt Companies in CalPERS’ 2019 Portfolio
The oil and gas bankruptcies in CalPERS’ portfolio further illustrate the volatility and risk of fossil fuel investments. In keeping with its “hands off” style of investing, CalPERS continues to hold bankrupt companies, perhaps hoping they will rebound. But unlike other industries, fossil fuels are now entering the last phase of their use as an energy source. The decline of fossil fuels is a necessary and inevitable consequence of the damage they cause to our planet and its inhabitants. Oil and gas bankruptcies will likely continue at record rates, and burden the state with huge cleanup costs. The drumbeat of bankruptcies could even intensify as the fossil fuel energy sector contracts.