Oil and Gas Bankruptcies Grow as Investors Lose Appetite for Shale, Smaller drillers, which account for sizable part of U.S. oil production, are struggling to pay off hefty debt burdens by Rebecca Elliott and Christopher M. Matthews, Aug. 30, 2019, Wall Street Journal
Bankruptcies are rising in the U.S. oil patch as Wall Street’s disaffection with shale companies reverberates through the industry.
That nearly matches the 28 producer bankruptcies in all of 2018, and the number is expected to rise as companies face mounting debt maturities.
Energy companies with junk-rated bonds were defaulting at a rate of 5.7% as of August, according to Fitch Ratings, the highest level since 2017. The metric is considered a key indicator of the industry’s financial stress.
The pressures are due to companies struggling to service debt and secure new funding, as investors question the shale business model.
Many drillers financed production growth by becoming deeply indebted, betting that higher oil prices would sustain them. But investor interest has faded after years of meager returns, and some companies are struggling to meet their obligations as oil prices hover below $60 a barrel.
Private companies and smaller public drillers have been hit hardest so far. Those producers collectively generate a large portion of U.S. oil, according to consulting firm RS Energy Group, and their distress reflects issues affecting all U.S. shale.
“They were able to hang in there for a while, but now their debt levels are just too high and they’re going to have to take their medicine,” said Patrick Hughes, a partner at Haynes & Boone.
Unlike several years ago, the current round of bankruptcies isn’t driven by a collapse in crude prices. The U.S. benchmark oil price has roughly doubled since 2016, when crude bottomed out below $30 a barrel. That year, 70 U.S. and Canadian oil-and-gas companies filed for bankruptcy, according to Haynes & Boone.
The current financial strain on shale producers is likely to intensify as many companies that took on debt after the 2016 oil slump face large debt maturities in the next four years. As of July, about $9 billion was set to mature throughout the remainder of 2019, but about $137 billion will be due between 2020 and 2022, according to S&P.
The debt of Houston-based Alta Mesa Resources Inc. is among the riskiest U.S. bonds, according to Fitch. Initially handed a $1 billion blank check by investors to invest in shale, the company said earlier this year its future is in question.
“A lot of companies are highly levered and facing maturities on their debt that I like to call a murderer’s row, maturities are coming year after year,” said Paul Harvey, credit analyst at S&P.
That could spur a race to refinance, but many energy bonds are pricing higher. …
Energy is the largest sector of the high-yield market, but companies have backed away as the cost of capital has increased. As of July, this year’s energy high-yield issuances had fallen 40% from the same period a year earlier, while overall corporate high-yield issuances rose 32%, according to Fitch Ratings.
“Any available capital structure is going to be more expensive than it was a year ago,” said Tim Polvado, the head of U.S. energy for the Paris-based bank Natixis SA.
As is often the case in corporate bankruptcies, many equity holders might be all but wiped out while bondholders emerge as the owners of reorganized shale companies.
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