The looming oil patch bankruptcies underscore the fragile state of the boom-to-bust industry even before the coronavirus crisis.
“These companies were in trouble before COVID-19 happened,” John Kempf, senior director at Fitch Ratings, told CNN Business. “After 2015 and 2016, they never really got their balance sheets back together. When stress came, they weren’t prepared for it.”
There’s so much crude that the world is running out of space to store it all. That conundrum caused crude to tumble well below zero last week, marking the first instance of negative oil prices since futures launched in 1983.
$43 billion of energy junk bond defaults
Prices are so weak that Rystad Energy has warned that hundreds of US oil exploration and production companies could file for bankruptcy by the end of 2021.
Fitch Ratings is warning that more than $43 billion of high-yield bonds and leveraged loans in the energy sector will default in 2020. For context, that’s nearly five times the sector’s average level of defaults over the previous dozen years.
Moody’s Investors Service cut its near-term oil price assumptions this week, forecasting that US oil prices will now average just $30 per barrel in 2020, a price too low for virtually any US shale oil company to turn a profit. Moody’s sees US crude rising to just $40 in 2021.
“Financial risk is rising and likely to remain very high for all but the highest-rated oil and gas issuers,” Moody’s wrote in the report.
Chesapeake Energy at risk
The energy sector dominates Fitch’s Top Bonds of Concern list of troubled debt, accounting for 60% of the list.
No one wants to lend to a shale oil company that can’t generate free cash flow at cheap prices. That makes it difficult for frackers to roll over existing debt before it’s due.
“There is no access to capital markets to refinance. Lenders are skittish about giving money to this industry,” said Kempf, the Fitch director.
Moreover, there is investor fatigue given that the energy industry has struggled for years. The S&P 500 energy sector was the worst performer — by a long shot — throughout last decade.
“Portfolio managers are tired of the volatility in oil and gas prices. They don’t want to be in the sector anymore,” Kempf said.
Washington to the rescue?
“We will never let the great US oil & gas industry down,” the president said.
Treasury Secretary Steven Mnuchin said last weekend that the Trump administration is considering providing a “lending facility” to the energy industry.
Analysts said oil companies with sturdy investment grade credit ratings will likely have access to these emergency funds.
“We can only make loans to solvent entities with the expectation that the loans will be repaid,” Federal Reserve Chairman Jerome Powell said Thursday while speaking generally about the central bank’s lending abilities.
But it’s not clear whether junk-rated shale oil companies will get access to the funds they need to survive because of their shaky financial conditions.
“I’m not counting on it to protect against defaults,” Fitch’s Kempf said. “A lot of these companies could not access capital markets even before COVID.”