The Russian invasion of Ukraine has seen an increased demand for oil and gas as Russia is a refined products powerhouse. Oil and Gas companies are making huge losses, opting to file for bankruptcy. Haynes and Boone, a US-based law firm noted that in 2020, over 100 firms went bankrupt. Some of the companies include Diamond offshore drilling, Chesapeake Energy, Oasis Petroleum Inc., Peers Whiting Petroleum Corp, Noble Corp, Superior Energies Limited, and FirstEnergy Solutions Corp.
Why are the Gas Companies going Bust?
Several gas companies have gone under following increased production costs, capped prices based on consumer protection, and pulled out investors from these companies owing to poor market performance. Oil and gas companies need heavy investments to dig up wells for production. Investors look at the market performance of the company to decide on their investment portfolio. Poor market performance creates panic and an eventual withdrawal of funds by the investors. Low funds hamper operational and production costs to low production.
Some companies entered into heavy debts resulting in petitions for bailouts and/or filing for bankruptcy. Profit margins, if at all, are minimal and, many companies have sunk into debt. President Biden has termed the increased fuel costs as ‘Putin’s tax’ but gas companies were struggling as early as 2020. Companies that have been unable to attain their production targets have laid-off workers. Aggravated situations have led to the eventual liquidation and shutting down of those companies. Amidst all the companies that have gone under, FirstEnergy is such. A case study on FirstEnergy will help the reader appreciate the current market behavior of companies in the gas market and how gas companies are eventually filing for bankruptcy.
Case study of FirstEnergy Solutions Corp
FirstEnergy Solutions filed a voluntary restructuring petition on March 31, 2018, to restructure its business. The company owns several coal plants, oil plants, and nuclear power plants. FirstEnergy Solutions announced the shutting down of three of its nuclear power plants in a press release on April 2.
FES, a bankrupt company, filed for Chapter 11 bankruptcy in the United States Bankruptcy Court. In this arrangement, a debtor suggests a plan for continuing in business, and creditors vote on the plan. If the proposed plan is approved, then distress by creditors is stayed as the company continues with its operations. The aim of Chapter 11 is to maintain the company as a going concern. FES eventually rebranded to Energy harbor after creditors took over. Their bailout, however, was tainted with allegations of bribery. Not many companies can follow through with the plan after petitioning for bankruptcy under chapter 11. ..
Effects of going under
Job losses are a natural consequence of bankruptcy. A company that can no longer meet its financial obligations is unable to pay its workers, leading to massive layoffs. This reduces liquidity as the income of the workers goes down and their transactions become limited, hindering rampant money circulation. Seadrill and Superior energy services Inc. are some of the companies that carried out massive layoffs owing to bankruptcy. ..
Listed companies that are liquidated experience underperforming financial markets. This is because investors, mainly foreign investors, quickly withdraw their money when they see a company being delisted. The market capitalization of the company also decreases, which leads to underperforming financial markets. ..
Proposed Way forward
Companies can seek restructuring, mergers, and acquisitions to remain going concerns. Companies that are overwhelmed with huge debts, can talk to creditors into converting the debts to equity at their companies.
The US Government should have strict regulations for the payment of bonuses to top executives after bailout decisions. Listed companies should only issue bonuses when they are performing very well. Approving disbursements in huge tranches to the management of companies while in distress implies bad faith and poor management.
The Trump administration has been accused of using taxpayer money to bailout companies that have contributed to the president’s campaign coffers. This practice erodes investor confidence and takes away from the government’s ability to help “genuinely ailing companies.” The Trump administration has also been accused of using money that would otherwise be used to help “genuinely ailing companies” to pay campaign financiers instead of helping struggling Americans. This practice takes away from the government’s ability to provide essential services, such as jobs.
Conclusion
The article discusses how gas companies have been struggling in the past few years due to economic conditions and the Covid-19 pandemic. However, there are some positive aspects to this situation. For example, many companies have filed for bankruptcy because of the economic downturn, but this has led to better corporate governance. This has helped to prevent any serious problems from happening and it has given the government a chance to intervene. In addition, relations between countries have been difficult due to the Russian invasion of Ukraine, but this has not stopped gas companies from trying to sell their products in that country.
