[Editor's note: A version of this story appears in the October 2020 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

There are few better ways to make money vaporize than by placing a bet at the horse track.

To outsiders and gamblers alike, it progresses like the world’s dumbest magic trick.

Bettors examine the horses and riders in the paddock. (Insider tip: The best dressed jockey should not be a factor.) Then, a $2 bet placed, they watch the race run. Presto-chango, the $2 transforms into a tiny, worthless ticket stub.

Enjoy your beer.

Which is why there ought to be a stalking-horse track. Why bet against the house when you can bid for it? In truth, the stalking-horse derby for bankrupt oil and gas assets has started to pick up some momentum.

At the crack of a bankruptcy judge’s gavel, stalking-horse bidders slowly lurch out of the starting gate, lower their long necks and graze among the bankruptcies.

The slowly revealed results are fascinating.

Zarvona Energy LLC’s stalking-horse bid resulted in a $115.5 million deal for Approach Resources. Mach Resources LLC closed a $220 million acquisition of Alta Mesa Resources. And Presidio Petroleum LLC turned a $91 million deal with Templar Energy.

The three companies entered bankruptcy with a combined $4.9 billion in debt.

For a total payout of less than $430 million, the debt-laden assets sold for roughly $0.09 on the dollar. The total would have been higher, but Approach Resources and Alta Mesa were forced to negotiate new deals after the commodity collapse that began in March shaved away about $177 million in proceeds.

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Buyers-in-waiting of distressed assets have long been expected during this downturn of apocalyptic proportions. And there’s every reason to believe 2020 will be worse for companies than the calamitous 2016.

Through the end of August, bankrupt E&Ps have limped into bankruptcy courts with nearly $51 billion in secured and unsecured debt. That’s more than the past three years combined. Only 2016 has seen a higher number of insolvent companies seeking Chapter 11 bankruptcy and a higher amount of debt.

Haynes and Boone LLP’s bankruptcy monitor sees no near-term hope for U.S. producers and a reasonable expectation that a substantial number of producers will continue to seek protection from creditors in bankruptcy before the year is over.

Also notable is the total secured debt involved in 2020 producer bankruptcies, which already exceeds the total for 2016.

Haynes and Boone likens the disappearance of unsecured debts to the burning away of a heat shield that protected secured lenders.

Mari Salazar, senior vice president and manager for BOK Financial, said when she started in energy banking, banks felt secured if operators had proved developed producing assets. That confidence has plummeted as losses have soared in bankruptcy.

If “you were a senior secured lender and you really didn’t have much of a risk for loss, that has really changed these days,” she said. “You’ve seen articles where banks have taken $0.31 on the dollar or $0.50 on the dollar. And that’s really what I think has changed the market.”

The pandemic “allowed us to rethink how we’re approaching our customers and needing to prepare ourselves for the fall and what that would look like,” she added.

Banks, now aware of their vulnerabilities, will place stricter controls on lending.

“You’re going to see tighter structures. We’re starting to see that now [with] cash flow sweeps, tighter RP [restricted payment] baskets,” she said.

More bankruptcy sales are inevitable, particularly as lenders grow weary of getting burned. In August, bankrupt E&P Lilis Energy Inc. said it would shift from restructuring to a sales process after investors balked at throwing more money at the company.

The Delaware Basin company had flirted with bankruptcy for a while and went to the courthouse in June with about $580 million in debt. But in August, Värde Partners Inc., the owner of Lilis’ outstanding preferred stock, decided against investing more money.

For all the talk of racing and stalking horses and money, perhaps—the industry has a gambling problem. But it’s more complicated. E&Ps have a love problem in that their investors don’t love them.

In D.H. Lawrence’s short-story The Rocking-Horse Winner, a boy furiously rides his rocking horse until, through some clairvoyance, he can predict a winning racehorse. All of this so he can give the winnings to his mother. Spoiler alert: All this rocking-horse riding eventually kills the poor boy.

Hope, oil and gas executives like to say, is not a strategy. The same might be said for wishful thinking. Abandoning prudence may ultimately have been the industry’s biggest gamble.

Or as Lawrence would put it, they bought land for the riches, but the riches turned to dust.