Ask Mr. Smarty Plants

You didn't mention any signs of disease or discoloration of the leaves, so I am hopeful that the loss of bark may simply result from some sort of injury to the trunk aggravated by drought.  I am assuming that your tree is a Quercus fusiformis (Escarpment live oak), the most common oak in our area. This species and the Quercus texana (Nuttall oak), or Texas red oak,  are in a class called red oaks and are susceptible to a fungal disease called Oak Wilt.  (Quercus stellata (Post oak), Quercus macrocarpa (Bur oak), and  other white oaks are not afffected by Oak Wilt). 

It is not always easy to determine if an oak suffers from Oak Wilt.  The first symptoms are usually discolored leaves.  Read this article from Texas A&M Horticulture Things You Should Know About Live Oak Decline.  It should help you decide.  If the wound was fresh and releasing sap between February 15 and June 15, when the nitulidid beetle is active, it could have been visited by this insect.  If the beetle had been visiting an oak tree with Oak Wilt, he could have carried the fungus for Oak Wilt on his body, and might have infected the wounded oak as it dined on the sap.  Visit the Texas Oak Wilt site to familiarize yourself with the symptoms, prevention and treatment of the disease.

Mr. Smarty Plants has received many questions along this line.  Other fungal diseases could also cause bark damage.  Our answers often suggest reading the comments of Eric Becker of the Texas Forest Service:
"After being stressed by the drought many of our oaks were further damaged by Hypoxylon and borers.  As soon as you hear someone say the bark has fallen off, you can bet that their drought stressed tree has hypoxylon cankers (first brown and powdery, and then a silvery crust) and the prognosis is not good." 
Go to the  TAMU AgriLife Extension Plant Pathology page to find three fact sheets about hypoxylon:  Hypoxylon Fact Sheet #1, Hypoxylon Fact Sheet #2, and Hypoxylon Fact Sheet #3.  Does this description jibe with your tree's damage?

If you live in the areas north of a Wimberley-to-Kyle line then there is the chance that oak wilt could be at play as well.  Trees damaged by oak wilt can also display hypoxylon cankers, so then we look for the pattern of mortality, groups of oaks dying side by side, and the brown vein leaves.  Drought mortality accompanied by hypoxylon cankers usually occurs on one or two oaks over here and another two or three over there—the sick trees are scattered about with healthy ones in between.

Williamson County is in the Austin District of the Forest Service, and you will find Eric Becker's office contact information at this page in the "Getting Help" section. If you fear that Oak Wilt has attacked your tree you need to do this as soon as possible; there is no cure for Oak Wilt and if it has already invaded some of your trees, all of your others are at risk, also. 

But let's get back to the wounds.  Bruised and peeled bark should be treated to promote rapid healing. Trim around the wound to sound tissue on each side. Use a sharp knife and do not cut any deeper than necessary. The top and bottom should be rounded instead of forming a sharp point. This will facilitate movement of moisture and nutrients around the damaged area. When done properly, healing should occur completely around the wound if there is no systemic fungal disease.  For the sake of your tree, I hope that is the case. 

Some oak images from the Lady Bird Johnson Wildflower Center Image Gallery