ShippingWatch

Law firm sees potential in oil bankruptcies

The future will bring a growing number of bankruptcies in the oil industry, US-based law firm Willkie Farr & Gallagher tells ShippingWatch. The company, whose work includes the restructuring of carrier Eitzen Chemical, expects to land some of the jobs related to the struggling oil companies.

The crisis in the oil industry and the prospect of a low oil price in the next five years have already caused mass layoffs at companies such as Statoil, large-scale at for instance Exxon, and tough contract renegotiations with subcontractors including supply carriers, such as Topaz and Maersk Supply Service, as well as consulting firms.

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Before long, bankruptcies in oil companies and suppliers to the industry could also emerge visibly, law firm Willkie Farr & Gallagher tells ShippingWatch.

The law firm is based in the US and its specialties include restructuring, as well as mainstream corporate advice to the shipping industry, counting CMA CGM and STX Europe among its clients. The company's London office also handled the restructuring of Eitzen Chemical, now Team Tankers International, a process that was completed around the turn of the year. The law firm also has several clients among oil companies around the world and among suppliers.

"In the restructuring business more generally – there has been an uptick in restructuring work, although not as much as some commentators have predicted given the prolonged depressed price of oil. We are actively involved in some live restructuring mandates," Graham R. Lane, partner at Willkie Farr & Gallagher's London office for restructuring, tells ShippingWatch, adding:

"Low oil prices are encouraging opportunistic private equity acquisitions; more sellers are coming to market as consolidation is encouraged in order to drive costs down."

Major changes underway in the oil industry

Developments in the oil market will be visible on three levels in the coming years, notes the law firm.

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1. Oil companies will continue to cuts in capital expenditure and investments. Specifically, explorers and producers are expected to scrap high cost, high complexity projects and focus on gaining exposure to low-cost projects via mergers and acquisitions.

2. Ongoing opportunistic activity in acquisitions and mergers. Oil services companies have already begun to see a significant amount of corporate activity. One example is France's Technip, which has made presented an offer to company CGG, a provider of seismic surveys.

3. Integrated oil companies such as BP and Statoil will see less activity, but there will be some deals in order to try and move down the cost curve.

Cost reductions and changes will become part of the oil companies' new normal for at least the next five years, as the oil price is expected to remain low.

"Likely ongoing price stagnation. Goldman Sachs has slashed its oil price forecasts and predicts that Brent crude oil will trade at USD 55 dollars a barrel for the next five years, which is more than USD 10 lower than current prices and at a discount of USD 20 to 2020 futures," explains Graham R. Lane.

Showdown in 2015

Willkie Farr & Gallagher's assessment of the oil market closely echoes that of another major law firm. Norway's largest law firm, Wikborg Rein, told ShippingWatch in late April that the company expects to see numerous cases filed in relation to an industry showdown following the declining oil price - a showdown that could be even fiercer than the one following the shipping industry's downturn in 2008.

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Partner Steffen Pedersen, who works for Wikborg Rein in Singapore, was generally quite pessimistic in his assessment of the prospects for the oil and gas industry.

"The drop in the oil price will have significant consequences for the whole market. The banks have pulled out from many projects and left a portion of the market open to new players such as equity funds. So far we have not seen a lot of disputes but this is just the eye of the storm. At the end of 2015 and in the beginning of next year, we will be seeing a whole lot of disputes over companies that can't live up to their commitments. These disputes, as we'll see, will involve a lot of money and they will be fierce," said Steffen Pedersen.

He explained that Wikborg Rein had already handled the first dispute for a Brazilian customer, but there are many more in the pipeline because many companies will try to exit the current contracts in order to negotiate better conditions.

"The dispute will be worse than following the collapse that we saw after the shipping crisis of 2008. And some of the cases that we are concerned with today stem from back then. The cases that are coming due to the oil plunge will be huge and could take even longer than what we have experienced in shipping before," he said.

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