When the 2014 to 2016 oil and gas price collapse took hold, a large number of independent producers found themselves in dire straits. If prices do not rebound quickly in 2020, the industry could be facing a similar situation, or worse.

During the two-year price downturn, producers who had overspent in an effort to expand were faced with suddenly overloaded balance sheets and high breakeven prices. That left many dealing with the prospect of bankruptcy, and at least 70 filed for Chapter 11 bankruptcy protection in 2016 alone. Producers now have far lower breakeven costs, but a number still have damaged balance sheets dating back a half-decade. Prolonged exposure to prices in the low- to mid-$30 per barrel range could push many over the edge.

"If prices remain depressed below $40 per barrel for more than a few weeks, we will likely see a repeat of 2016," Haynes and Boone LLP Partner Buddy Clark said. Haynes and Boone has kept a tracker of producers that have filed for bankruptcy since 2015, a total that stood at 208 in December 2019. The 2019 total of 42 was the highest in three years, and Clark said the number had already increased in the opening months of 2020 even before the price war between Saudi Arabia and Russia sent prices crashing March 9.

There could have been more bankruptcies in 2015 and 2016, but there was a saving grace: banks and other funding sources were willing to pump capital into the sector, keeping a number of producers above water. Those sources have now dried up, leaving independents with fewer options.

"For those producers still standing and faced with near term debt maturities, there is less access to capital now than there was in 2016, with fewer options to restructure other than filing for bankruptcy court protection," Clark said.

A possible exit route for struggling companies — being acquired — appears to be blocked by the price crash. Producers that have made acquisitions were frequently punished by investors before prices lost double-digits per barrel overnight; now, very few expect to have the free cash flow to make such a move.

"The market's sentiment over the past 12 months has been that if you don't show free cash flow, investors will drop your stock or go to another industry that can," Clark said in January. "It's best for the industry to clear out the zombie companies that have just been hanging on and hoping the market will bail them out, and let the healthy companies that can show free cash flow and can develop their assets to thrive."

One possible lifeline for "zombie companies" seemed to appear earlier this week when the Trump administration floated the idea of a "shale-out" for producers battered by the most recent price collapse. Industry groups came out against the idea of a direct federal cash injection to companies in the sector, and the prospect of that happening now seems remote.

"While a shale-out may seem compelling to try to protect the US oil industry in the wake of government policies from OPEC's own moves, it would be a politically challenging action that would likely face significant opposition," said Regina Mayor, KPMG's global and U.S. head of energy and natural resources. "Instead, it's more likely that we'll see programs enacted that are focused on the worker ― payroll tax cuts, for example, could be a more realistic solution to alleviate some of the distress. With stock prices this low, there might be the opportunity for those investors who believe in the underlying strength of the sector to make bold moves. But for now, I foresee most companies taking drastic measures to survive in the short-term."