IT IS ESTIMATED that roughly 300 upstream companies will file for bankruptcy in 2016, and many management teams are curious about hedging alternatives during the restructuring and bankruptcy process. There are various alternatives management teams can take with their hedging programs, ranging from full liquidation to actually increasing hedge coverage. The foEowing discusses the purpose of an effective risk management program, what typically happens to hedges during the bankruptcy process, and the hedging alternatives for a distressed company. The purpose of a risk management program is to protect a plan or a path forward. Upstream companies face a variety of business risks that could limit their progress towards achieving a plan, particularly as commodity prices remain volatile and depressed. The spectrum of business risks is wide, including cash flow risk, regulatory risk, human capital risk, etc. However, the value proposition for upstream companies is relatively straightforward, which is to search for, develop, and extract hydrocarbons. In doing so, upstream companies must have enough cash flow not only to support a level of capital expenditures and exploration activity to ensure that oil and gas continues to flow, but also to make debt payments, comply with debt covenants, and support the general and administrative costs associated with running any commercial enterprise. Hedging programs at upstream companies are developed with the primary purpose of providing a level of cash flow to increase the likelihood of meeting those needs and helping avoid insolvency.
展开▼
