How dispute finance can help distressed energy companies around the globe: Focus on North America

In this 3-part series, Omni Bridgeway obtains insight from its global team about the current state of world affairs and its effect on the energy industry. In part 1 of this series, we turn to our colleagues in North America. Houston-based Amy T. Geise, an Associate Investment Manager and Legal Counsel, and Eric Chenoweth, Head of the Houston office, Investment Manager and Legal Counsel along with Toronto-based Naomi LoewithDirector of Strategic Partnerships for Canada, as well as an Investment Manager and Legal Counsel provide their thoughts on the economic climate, how energy sector businesses are faring in their regions, and what those businesses should know about dispute funding as they navigate uncertain times ahead.

Historically low commodity prices, volatile markets, and decreased demand are putting unprecedented stress on energy company finances.

Between January and March, crude oil prices plunged 50 percent and by April, some benchmarks were trading at negative levels. Though oil prices have rebounded somewhat in recent weeks, crude oil is expected to trade down 43 percent from 2019’s per barrel average. Similar declines are anticipated in 2020 for all types of energy, including natural gas and coal.

In previous downturns, companies in the energy sector turned to dispute funding as an effective tool to unlock the value of their litigation assets and dramatically reduce the cost and risk of litigation.

We turn to global dispute finance company, Omni Bridgeway, to obtain their experienced team’s perspectives on the economic climate, how energy sector businesses are faring in their regions, and what those businesses should know about dispute funding as they navigate uncertain times ahead.


United States of America
What is the nature of the energy industry and what energy-centric businesses are predominant in your region?

Houston is known as the “Energy Capital of the World” for good reason. Houston is the world’s leading center for oilfield equipment construction and over one-third of the nation’s publicly traded oil & gas firms are based here. We are home to over 3,000 energy related businesses focused on all aspects of the industry.

How has the downturn in the energy sector impacted your region economically? What do you project for the coming months and years?

Oversupply in the global crude oil market has resulted in inventory levels not seen since 2017. But unlike 2017, we’re currently facing reduced demand and prices due to the Covid-19 pandemic. There are various reasons for these reductions, including historically low airline operations and shrunken hotel and restaurant operations. In the second quarter, refinery utilization in the United States ranged between 60-76%, well below the typical 95%. As a result, several refineries in Texas have announced that they are partially shutting down operations while demand remains suppressed.

In this environment, we’ve seen stress on the upstream sector as businesses slash spending to conserve cash. However, we anticipate eventual stress in the midstream space as well. We’ve also seen furloughs and layoffs at numerous large energy companies, including Transocean Deepwater, Halliburton, Baker Hughes, Tenaris, Diamond Offshore, and Energy Transfer.

Do you anticipate that the downturn will result in increased litigation? What kind?

It seems inevitable that the downturn will yield increased disputes and ultimately litigation, such as suits for breach of contract and employment litigation. Likewise, we are already seeing a surge in energy bankruptcies in the Southern District of Texas (e.g., Diamond Offshore, Yuma Energy, Victerra Energy, Galivan Resources, Whiting Petroleum, Skylar Exploration, Ultra Petroleum, and Freedom Oil and Gas), which will surely give rise to additional litigation.

What should affected businesses know about dispute finance?

In order to survive a downturn in the energy industry, companies should strive to diversify their assets and build a self-sufficient business model that isn’t dependent on outside capital. Thus, this is an opportune time for industry players to unlock the value of their contingent litigation assets and avail themselves of the benefits of dispute funding.


Canada
What is the nature of the energy industry and what energy-centric businesses are predominant in your region?

Canada is a resource-rich country. It has the third-largest global supply of proven oil reserves, and as a result of its political stability, Canada is often considered the world’s most secure source of heavy crude oil.  Energy accounts for 23% of Canada’s total exports, and over 10% of Canada’s GDP. The vast majority of energy production in Canada is in the province of Alberta, which has been particularly hard-hit by the crisis. 

How has the downturn in the energy sector impacted the region economically? What do you project for the coming months and years?

The Canadian oil and gas industry was facing significant challenges before Covid-19, as a result of a number of stalled or cancelled infrastructure projects; the downward pressure on prices from the dispute between Russia and Saudi Arabia; continued political pressure to move away from fossil fuels to sources of renewable energy; and a decline in foreign investment. The Covid-19 pandemic has exacerbated these problems by depressing demand, even resulting in occasional negative prices.

Boards have quickly shifted their focus to preserving liquidity and solvency, including shutting-in production, reducing budgets, cutting compensation, laying off employees, and obtaining lines of credit or other access to cash. Government financial assistance is unlikely to address the crisis sufficiently, and such programs will also be impacted by reduced energy sector tax revenues.  

Companies will try to improve their balance sheets, including by seeking partnerships or off-balance sheet financing. They will also seek to sell non-core properties or assets. 

Do you anticipate that the downturn will result in increased litigation? What kind?

There is likely to be litigation over force majeure clauses, joint-venture obligations, landlord-tenant relationships, business interruption insurance, and possibly corporate governance issues. We also anticipate an uptick in bankruptcies and insolvencies. Some of this litigation will emerge in the short-term, but it’s likely many claims will be shelved until shortly before the limitation periods expire, as there is limited cash to advance those claims now.

What should affected businesses know about dispute finance?

Dispute finance can solve two problems during this crisis. First, it can pay the legal fees and expenses for litigation, enabling companies to pursue claims off balance sheet. Second, it can provide working capital to sustain the business; that financing is secured only against the proceeds of litigation. These options can enable companies to realize assets that would otherwise be untapped, thereby providing liquidity and potentially unlocking significant returns.

While difficult times may be ahead for companies in the energy sector, dispute finance has proven to be a useful tool to help companies get through the eye of the storm by maintaining cash flow and unlocking previously untapped litigation assets. Indeed, dispute funding could be the key for some companies to sustain themselves through an economic downturn. 

In the next post in this three-part series, we’ll check in with our APAC colleagues: Nathan Landis, an Investment Manager based in Omni Bridgeway’s Perth office, and Shane Taylor, a Business Development Director based in Omni Bridgeway’s Sydney office, as well as Marjolein van den Bosch-Broeren, Head of Enforcement for Asia and Singapore-based Chee Chong Lau, an Associate Investment Manager and Legal Counsel, about the impact the downturn is having in Australia and Asia.