According to a partner at law firm Haynes and Boone LLP, the rapid collapse of oil prices could set off a wave of bankruptcies that dwarfs the worst of the 2014 to 2016 downturn.

In a conversation discussing the firm's latest update on bankruptcies in the upstream oil and gas segment, Jeff Nichols, a member of the energy transactions group, said the factors that protected a number of producers during the two-year decline beginning in 2014 are no longer in place in 2020.

"[During the previous price collapse] private equity was there to help out. Now, there's nobody out there," Nichols said. "If 2015 was a category 2 hurricane, this is a category 5."

The Haynes and Boone update reported only seven bankruptcies in the first quarter, with the late-March announcement by Whiting Petroleum Corp. being by far the largest. Nichols said those bankruptcies were "the storm before the storm," with more coming in the next two quarters. The busiest quarter for bankruptcies since the law firm began monitoring the segment in 2015 was the first quarter of 2016, when there were 34; Nichols indicated that record would likely fall at some point this year.

"Later this summer and fall, there will be an avalanche of filings," he said.

With the industry being slammed with the combination of rapidly declining oil prices and demand destruction caused by the COVID-19 pandemic, producers are finding their balance sheets under more stress than any had expected coming into the year. Spring redeterminations could cause severe cuts to borrowing bases, and other sources of financial backing have essentially evaporated.

"Right now, there doesn't seem any interest among investors, banks, private equity or public equity to invest in these companies," Nichols noted. "They're waiting for the bottom to hit. And many of the traditional sources have liquidity problems of their own due to the virus."

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Private equity, which had become a key funder of independent producers over the past half decade, finds itself in that kind of dilemma. During 2019, many private equity firms found themselves unable to jettison their investments in producers and were forced to ride out a negative market; now, they may have no choice but to sell and stay out of the sector for the near future.

"Over the last year, a lot of the biggest private equity investors … sat on their investments and created a lot of zombie companies. In this environment, they will be forced to recognize their losses," Nichols said. "A lot of new, smaller private equity sources will have to come in and get us through to the other side."

While no play is likely to be immune to the projected wave of bankruptcies, the lower-cost Permian Basin may see a smaller percentage. Higher-cost regions such as the Bakken Shale and the SCOOP/STACK plays will likely see more. While M&A activity will likely not be the first idea on the minds of companies capable of riding out the downturn, Nichols said opportunities for larger independents to add acreage in the Permian will likely occur.

With the industry being quickly turned on its head, companies that were being weighed down by natural gas assets are suddenly finding them to be the most profitable in their inventory. Nichols said a projected increase in natural gas prices over the next year has been an unexpected boon for companies with large gas holdings.

"Previously, these companies were being valued for their oil production and the natural gas was being flared away," he said. "Now, companies with large natural gas portfolios are increasing in value."