Rising financial stress in the U.S. energy sector has prompted some suppliers and vendors to take unusual legal action to collect unpaid debts: forcing struggling companies with billions of dollars in debt into bankruptcy.
Since August, creditors have filed petitions for involuntary bankruptcy against three energy producers with nearly $2 billion in combined debt: Miller Energy Resources Inc, Black Elk Energy Offshore Operations and Energy & Exploration Partners Inc.
During that period, there have been a total of seven bankruptcies involving energy companies with at least $200 million in debt.
Black Elk also faces federal charges related to a platform explosion in the Gulf of Mexico in 2012 that killed three and resulted in a spill.
Involuntary bankruptcies signal deepening pessimism about the crude market outlook and herald more distress for oil and gas producers if prices stay low.
Petitions for involuntary bankruptcy, which seek to impose court oversight on a company that is not paying its debts, are very rare and typically target smaller operations. Over the past decade, they accounted for less than 1 percent of the tens of thousands of business bankruptcies filed each year, according to the Administrative Office of the U.S. Courts.
Involuntary bankruptcies targeting large companies are particularly unusual. Over the past 12 years, creditors have taken such action against only six public companies. Four of those were filed this year. In addition to Black Elk and Miller Energy, creditors have also filed for involuntary bankruptcies against two public companies embroiled in litigation: a casino operator and a property firm.
"The downside risks are extreme," said Mark Salzberg, a bankruptcy attorney with Squire Patton Boggs in Washington. If a judge dismisses a petition for involuntary bankruptcy, the debtor company can seek its legal costs and punitive damages against the creditors that filed it.
But recently creditors have been willing to take that chance in a sign of receding hopes for an oil market rebound.
Oil prices have crashed to less than $35 a barrel at one point from above $100 a barrel 18 months ago, creating energy industry "zombies" that have been forced to slash costs and idle operations to conserve cash.
These producers have slashed thousands of jobs, and postponed paying bills.
"Some producers are getting very, very far out there with what they owe their suppliers," said John Sparacino, a bankruptcy attorney with Vorys, Sater, Seymour and Pease in Houston, who represented driller National Oilwell Varco in the Miller involuntary filing.
Lawyers expect more bankruptcies unless crude prices recovers. "If oil continues below $40 a barrel, we should expect to see even more energy filings, both voluntary and involuntary," said John Penn, a bankruptcy lawyer with Perkins Coie in Dallas.
Involuntary bankruptcy gives vendors some say over how an energy producer's dwindling funds are managed, and vendors can use it to try to stop a company from cutting deals that favor lenders or investors.
Such cases also allow creditors to choose the court, and all three of the recent cases have been filed outside the busy bankruptcy court in Wilmington, Delaware. Bankruptcy lawyers in Texas said that may suggest suppliers are worried the court is too eager to approve quick sales of businesses, which tend to favor secured creditors.
Baker Hughes Inc and Schlumberger, major oil field service firms, initiated the cases that put Miller and Energy & Exploration Partners into bankruptcy. The Black Elk case was filed by smaller privately held vendors: Gulf Offshore Logistics and The Grand Ltd of Louisiana, and Ryan Marine Services Inc and Laredo Construction Inc of Texas.
In securities filings, Baker Hughes and Schlumberger described more than $300 million of accounts receivables as "doubtful," or unlikely to be paid. If an energy producer becomes financially distressed that kind of trade credit is less likely to be repaid than a loan, which is secured by collateral.
Baker Hughes, which has agreed to be acquired by Halliburton Co, declined to comment and Schlumberger did not respond to a request for comment.
To seek an involuntary bankruptcy, a creditor must be able to prove it is legitimately owed money and that the company generally is not paying its debts as they come due.
Companies can seek to dismiss the involuntary filing, but often they opt to convert the case to a voluntary bankruptcy, which gives them more control over the proceeding.
For example, Black Elk Energy converted its case to a voluntary bankruptcy a month after creditors filed the involuntary petition.
A lawyer for the creditors, Matthew Okin of Okin & Adams in Houston, said the involuntary bankruptcy prevented the Gulf of Mexico producer from being stripped of all of its value in favor of the company's owners, Platinum Partners. "I think it was absolutely necessary," he said.
Platinum Partners did not respond to a request for comment.
Black Elk has appointed an independent chief restructuring officer who is investigating the allegations against Platinum Partners, said the company's lawyer Elizabeth Green, of BakerHostetler.
Energy & Exploration and Miller Energy did not respond to requests for comment.
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Amy Stevens and Tomasz Janowski)