Most oil producers would welcome higher crude prices, after a two-year downturn has pushed more than 100 U.S. energy companies into bankruptcy. But for some distressed drillers, a rebound could actually make things worse.
Throughout the rout in oil prices, senior lenders have largely been able to dictate the terms of energy bankruptcy proceedings as drillers' assets have fallen in value. But when oil prices rise, so does the value of a company's reserves. That can in turn can prompt so-called junior creditors to challenge restructuring plans in a bid to get a bigger piece of what's left of the pie.
Those junior classes include holders of the company's stock, who may see the value of their shares go to zero, and unsecured creditors, lenders or vendors the debtor owes money, but whose loans are not backed by collateral. In a bankruptcy, senior lenders have a legal claim to recover their investment before other more junior classes of debtholders.
High oil prices "embolden junior classes to fight harder, meaning possibly fewer agreements, and hence more need for a court process to resolve the issues," said Patrick Hughes, a Denver-based bankruptcy lawyer at Haynes and Boone.