Creditors from bankrupt oil and gas companies are suffering in the current climate, as loan recovery rates have plummeted while insolvencies have increased, which may even be on a par with the collapse of the telecoms industry in the early 2000s, according to Moody’s Investor Service.
The branch of the ratings agency which provides credit assessments, research, and risk analysis in 130 countries, has announced that in 2015 a glut of bankruptcies and defaults in the oil and gas sectors, have been encouraged by the low commodity price conditions.
Throughout 2015, Moody’s counted that there were 17 oil and gas bankruptcies, with 15 of them coming from the exploration and production sector (E&P).
The number of E&P bankruptcies has accelerated this year, with analysts anticipating that the volume of failed E&P companies will reach twice the number for last year.
In comparison, when the telecoms industry boom had turned into bust, Moody's Database recorded 43 company bankruptcies, during a three-year period between 2001 and 2003.
David Keisman, Senior Vice President at Moody's, suggested that the end result of the current unfolding patterns, could turn out to be a segment wide bust of historic figures.
The knock on effect on creditors has been huge, as the 15 E&P companies who filed for bankruptcy, held debts that totalled at least $100 billion.
Recovery rates for E&P bankruptcy in 2015 averaged only 21 percent, a significantly low ratio of arrears being claimed, far lower than the historical average of 58.6 percent.
Overall, Moody’s study revealed that the average recovery rate between 1987 and 2015 was 50.8 percent for corporate bankruptcy protection levels in that time.
Additionally, at the debt instruments level, in total 81 percent of reserve based loans were recovered in 2015, 17 percent lower than what was retrieved from E&P bankruptcies during 1987 and 2014.
Other debt instruments suffered more, high yield bonds recovered a derisory 6 percent, compared to a recorded rate in the low 30 percent range in previous E&P bankruptcies.
Oil prices have hardly been a boon to those companies which have been in trouble, with Brent Crude prices beginning to fall away midway through 2014, precipitating to a nadir for U.S. crude of just $30 per barrel in January.
According to Deloitte’s report released earlier in the year “The Crude Downturn for E&Ps: One Situation, Diverse Responses.”, E&P companies have made huge sacrifices, by slashing $130 billion of their capex spending, alongside other measures such as asset sales, equity issuance, and lower shareholder distribution.
The U.S. Federal bank regulator, the Office of the Controller of the Currency, is also keeping a watchful eye on the banks’ oil and gas portfolios, after seeing a rise in undeveloped reserves, which banks have used as collateral for loans.
Overall, the Deloitte report revealed that the debt/EBITDA ratio of a large section of U.S. oil and gas companies has surpassed the asset impairments threshold of over $135 billion by U.S. oil and gas companies.
Despite the adverse conditions of high leverage and weak operational performance, the thirst for risk has not dissipated Deloitte believes, with an estimated 40 percent of deals not being concluded for non-producing fields, which have high capex commitments, with no cash flow generation.
In addition, 64 percent of corporate deals by value, had a debt component of more than 20 percent, even though the banking industry is looking to squeeze the usual credit conditions.
Stephen Kennedy, the head of energy banking for Amegy Bank, reflected: “I am not surprised in a low price environment that we are seeing a high volume of bankruptcies. This is the worst downturn since the mid-eighties, there has been a dramatic price fall, and companies have not had the sufficient capital to withstand the situation.”
“They have to survive this downturn, they have to have liquidity needs to cut unnecessary capital expenditures and overheads. During this year, oil companies replaced only two thirds of their produced reserves, there is usually a 7 percent annual depletion of oil reserves. In 2014 it was different, as in North America there was an increase of 1.8 million barrels per day, and the rest of the world replaced all of their product reserves.” Kennedy added.
He also argued that it’s going to take more than a workout of debt repayment out of cash flow, conversion of debt will be needed where the public bond holders exchange their debt for company stock.
That relieves the company of the interest rate burden of that debt, although there is a risk that current stockholders may end up with nothing.
Kennedy opined: “Debt structure was far simpler and less complex in the mid-eighties compared to now, as then it was equity and bank debt, now they may have equity and may have subordinated debt, institutional investors, secondary debt to financial players, and then senior debt which is all banks, unsecured bonds are two thirds of the debt structure of the company.”
“It ends up being the lever of whether the company survives or not, the banks are suffering losses, and creditors, mostly bond holders are a large burden on the company, which is why bankruptcies are filed.”
Kennedy also agrees with the conclusion of the report, that there are more bankruptcies to come, which could leave creditors to be more out of pocket.
By Peter Taberner for Oilprice.com
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