Posted on 08/04/2015 5:15:24 AM PDT by thackney
Moody’s Investors Service says it expects more U.S. oil companies to default on risky corporate debt over the next few months as banks tighten lending standards and as contracts that locked-in higher crude prices for future production start to expire.
Oil producers in the second quarter accounted for seven of the nation’s 15 high-yield debt defaults, a three-year quarterly high. The credit ratings agency said its oil and gas liquidity stress index — a measure of corporate financial weakness in that sector — rose to 10.4 percent in June, up from 3.8 percent a year ago.
“We expect that the energy sector will continue to be a primary driver of defaults over the next year,” John Puchalla, a senior vice president at Moody’s, said in a written statement. Still, Moody’s stress index is well below the index’s peak of 26 percent during the 2009 financial crisis.
U.S. crude prices have fallen from around $60 a barrel last month to around $45 a barrel on Monday. Banks are set to reassess how much they should lend to oil companies in the fall, which could cut into oil companies’ borrowing bases. Banks are also starting to tighten lending standards, just as past hedges – contracts for future production – start to roll off and expose oil companies to the full brunt of current crude prices, said David Denechaud, an attorney at Sidley Austin in Houston.
“That’s going to drain liquidity out of the market,” Denechaud said. That doesn’t necessarily mean the producers will have to resort to Chapter 11 bankruptcy protection. Private investors have billions of dollars stashed away to purchase distressed oil companies, and more firms will probably sell themselves starting in the fall, he said. “I am not anticipating seeing a fire-sale atmosphere.”
The seven companies that defaulted in the April-June period include Houston-based Halcon Resources Corp., Midstates Petroleum Corp. and Sabine Oil & Gas Corp., which filed for Chapter 11 bankruptcy protection in June, becoming the sixth public American oil producer to do so this year.
The other four oil firms that defaulted were Denver-based Venoco, American Energy Partners’ Woodford unit in northern Oklahoma, New York-based Warren Resources and Lexington, Kentucky-based RAAM Global Energy Co.
Moody’s believes its overall U.S. liquidity stress index will rise from 2 percent in the second quarter to 3.2 percent in February, driven by financial pain in the oil industry. The firm expects the index to decline to 2.9 percent by June 2016.
Aka how free markets work. Risk/Reward and the profit motive function to protect consumers. It’s only in a free market that the customer is king.
A few Coal plants will be joining the bankruptcy bandwagon soon as well. Our “energy” supply is going to be a mess soon. Liberals have effectively neutered Nuclear, Coal and oil/gas with no viable replacement in sight.
Risky borrowing caused this. They were in debt to the stratosphere with no cushion for any sort of downturn, such as a slowdown in demand, which has been predicted by some years ago.
Demand did not diminish. The growth rate of demand decreased while the growth rate of supply increased.
Either way, they did not plan.
People predicted this from 5 or more years ago.
The excessive borrowing is what hit them.
They have been predicting this for a year now.
Yes, the majors will be fine.
The smaller independents, the bigger risk takers, will be selling assets to those that are not so deep in debt.
A few (hopefully only a few) have more liabilities than assets.
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