fracking equipmentAugust 27, 2015 - Section 362(d)(1) of the US Bankruptcy Code provides relief from the automatic stay “for cause including the lack of adequate protection.” Section 361 defines adequate protection as “providing either cash payments, an additional or replacement lien or ‘such other relief as to provide an indubitable equivalent…of interest in such property’.” A secured creditor that is over-secured is often denied a motion to lift the automatic stay based on 362(d).

In our blog The High Cost of Cheap Gas, we reported that this year alone, oil and gas companies have accounted for one third of the corporate-debt defaults worldwide. Companies like SandRidge Energy Inc., and Halcon Resources Corp. have had to issue new secured debt, which will make it difficult for unsecured bondholders to be repaid if the companies are in default. The markets are ripe for some really big defaults from the energy sector, and also those suppliers to the energy industry.

According to global oilfield service company Baker Hughes, the current count for working US gas and oil rigs is 885, which is down 53% from 1,896 just one year ago. This stunning drop in oil and gas drilling has flooded the used equipment market with oil field related equipment.

This changes the normal supply side for equipment in a big way. It's not just the rig related equipment that is hitting the market, but the support equipment, too. Bulldozers, backhoes, excavators, pipe layers, tankers, support trucks…the list is long.

Now, think for a moment about what else goes into constructing and running a drilling site: wood, concrete, steel and other metals, plastics, wire and cable—the list is virtually endless. The decrease in demand for these products and materials is the contagion that is spreading along with those in the crosshairs of energy. The prodigious contraction of the energy sector has already had an impact, and we have just begun to quantify the wreckage that will be left from the bankruptcies that will follow.

The first obvious factors to influence the demand side are those mentioned in the preceding paragraph - the users of machinery and equipment related to energy are no longer buyers, but sellers. Used equipment dealers, once the ‘safety net’ for value at auction sales have significantly scaled back their purchasing activity. Luckily, a substantial amount of this equipment has crossover application to more traditional construction, and these buyers are picking up some deals. Prices are more than 20% off year over year for most equipment in this sector.

Now, back to adequate protection: The market has changed in such a way so as to under-secure those that recently had adequate protection in their over-secured positions. As such, a prudent approach would be to revisit the current value of collateral to better reflect the changes of the last two quarters. Given the huge negative pressure on values recently, a creditor could expect a successful motion to lift stay under Section 362(d)(1), even where a similar motion was recently denied.

In short, revalue your collateral and keep an eye on these falling markets before, and during any proceeding.