The pace of bankruptcies in the oil and gas sector slowed during the fourth quarter of 2020, but some experts in the field believe that the amount of debt weighing on upstream companies makes an increase in bankruptcies in 2021 almost inevitable.

In its final bankruptcy tracker for 2020, the law firm of Haynes and Boone LLP reported only three Chapter 11 filings by exploration and production, or E&P, companies in the fourth quarter. That was the lowest quarterly number of the year and the lowest total since the third quarter of 2017.

In contrast, a total of 35 companies filed for bankruptcy in the previous two quarters.

The numbers were significantly worse for oilfield services companies, with 17 filing for bankruptcy in the fourth quarter of 2020. The previous quarter had been the worst for the oilfield services segment since Haynes and Boone began tracking bankruptcies in 2015, with 27 filings.

While producers were buoyed slightly by an increase in oil prices during the fourth quarter, Haynes and Boone said the push of crude toward $50 a barrel was likely not enough to keep struggling companies above water for very long.

"I was expecting more [bankruptcies]," said Buddy Clark, a partner and co-chair for Haynes and Boone's Energy Practice Group. "Prices popped up a bit … but, at some point, you just don't stop the process because price pops up a little bit."

Charles Beckham Jr., a partner in the firm's energy practice, said a larger factor in the small number of bankruptcies was lenders' unwillingness to force companies into Chapter 11.

"I think that, among the lenders and companies and professionals who work on these things, there was some fatigue," he said. "I'm aware of some forbearance agreements to forestall an immediate payment for some period of time. Everyone wanted to catch their breath, but there will be a resurgence."

While producers may have been able to hold off bankruptcy for a quarter or more, oilfield services companies were less fortunate. That misfortune, in large part, was due to E&P companies being less willing to drill due to low prices and the need to protect capital.

"If [oilfield services companies] don't have contracts with E&P companies to drill and service wells … it's hard to make those payments on debt obligations," Beckham said. "With the dramatic cut in capex by E&P companies, there's just not enough money to feed every mouth."

The way lenders assess the value of an oilfield services company in comparison to a producer may also put service companies at a disadvantage. While producers are judged by the amount of oil and gas their acreage is projected to hold, oilfield services companies are only as valuable as the deals they have in hand.

"With an oil and gas producer, if you lost all your rigs and employees, there's still value in the ground," Clark said.

Beckham cautioned that the underlying issues that caused the run of E&P bankruptcies in the middle of 2020 have not gone away.

"I believe there's still this wall of debt that borrowers can't climb over and that lenders and creditors are going to need resolution," he said.