Banks Much Deeper in the Hole on Oil & Gas Collateral than they Pretend, by Wolf Richter

They’re back…those mark-to-model valuations that make bank financial statements not worth the hundreds of pages they’re printed on. Last time it was mortgage securities and their derivatives. This time it has started in the oil patch, but rest assured, it will spread. From Wolf Richter at wolfstreet.com:

“All of it is in the gutter.”

An asset is ultimately worth what a buyer is willing and able to pay for it. That price turns out to be terribly low for oil and gas assets. This is a big problem for banks, which used these assets as collateral for energy loans they extended during boom years — a much bigger problem than suggested by the current spate of puny additions to loan loss reserves.

Natural gas driller Quicksilver Resources, which filed for Chapter 11 in March last year, sent an email to its remaining employees Friday night at 11 p.m. to announce the sale of all of its US oil & gas assets, the Fort Worth Star Telegram‎ reported. Saturday morning, it filed the documents in bankruptcy court in Delaware. The judge has to approve the deal.

The price it got for its US assets is an eye-opener.

The company, which is based in Fort Worth, TX, also owns some assets in Canada which it will try to sell separately. But they’re not included in the bankruptcy. When it filed for bankruptcy, it listed $2.35 billion in debts and only $1.21 billion in assets. “The rest was drilled into the ground to never be seen again,” I wrote at the time.

Only it’s a lot worse. All it got for its US assets was a paltry $245 million.

The proceeds from those sales — what’s left after lawyers and restructuring advisors get their cut — are going to be handed to the creditors. Tiny scraps to cover $2.35 billion in debts.

“This sale maximizes value for the benefit of our creditors in the face of difficult market conditions,” explained Quicksilver CEO Glenn Darden in a statement released Saturday.

The auction, originally scheduled for December but postponed due to the chaos in the oil and gas markets, was held last Wednesday. The buyer was BlueStone Natural Resources II, based in Tulsa, OK. It was formed in 2012 backed by Natural Gas Partners, a PE firm in Irving, TX. BlueStone has completed over 30 acquisitions of oil and gas assets in Texas with over 800 wells.

“The acreage is good, but under the current commodity price nobody can make any money,” Ross Craft, CEO of Fort Worth based Approach Resources, told the Star Telegram. His company had been approached last year about acquiring Quicksilver. “All of it is in the gutter,” he said.

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