Only weeks ago, scores of rating agencies sounded the alarm that the coronavirus credit crunch would set in motion a wave of corporate bankruptcies that would make the 2008 credit crisis look like child's play.
With many of the world's most advanced economies all entering a synchronized shutdown with no end in sight, it was clear that companies that have binged on cheap debt such as the U.S. shale sector would face a severe existential crisis as cheap credit taps suddenly run dry and loans starts to come due.
And now we are beginning to see a big wave of bankruptcies sweep through the U.S. oil and gas industry, with takeovers--not the usual restructuring--the first chapter in the new playbook.
According to Reuters, a raft of big lenders including JPMorgan Chase & Co, Wells Fargo & Co, Bank of America Corp and Citigroup Inc, have kicked off the process of setting up independent companies that will take over operations at distressed oil and gas companies.
Whiting Petroleum Corp. (NYSE: WLL) became the first victim of the shale bust after it filed for Chapter 11 bankruptcy on April 1 with other beleaguered producers such as Chesapeake Energy Corp. (NYSE: CHK), Denbury Resources Inc. (NYSE: DNR) and Callon Petroleum Co (NYE: CPE), reportedly having hired debt advisers, too.
The giant banks are looking to establish holding companies that will sit above limited liability companies (LLCs) containing the seized assets with the newly formed entities proportionally owned by banks participating in the original secured loans.
The last time that U.S. banks resorted to such extreme measures with energy companies was in the late-1980s when another oil-price collapse ravaged the industry.
Banks have mostly relied on loan restructuring processes that prioritize them as secured creditors with bondholders seeking control of the companies in the event of defaults.
But such is the high level of debt and uncertainty pervading the global energy sector that lenders are being forced to take more dramatic steps.
U.S. energy companies are indebted to the tune of more than $200 billion, with loans mostly backed by oil and gas reserves. According to Moody's, the U.S. oil and gas industry has about $86 billion of rated debt due over the next four years, one of the highest for any sector.
The oil price crash makes it especially hard for these companies to comply with their debt obligations.
Meanwhile, the sector dominates the $1.5-trillion junk-bond industry with about one-third of high-yield energy bonds in distressed territory.
Lenders have become very wary because they have much less protection than during the last energy slump. Back then, unsecured debt was mostly able to absorb losses in restructurings and was often converted to equity, leaving banks mostly unscathed. But with that insulating layer of junior debt gone and some top-seniority loans, such as those for Alta Mesa Resources Inc., also in default, they are really feeling the heat this time around.
Lenders typically evaluate the value of oil reserves used as collateral for bank loans twice a year and are likely to use the spring negotiations to limit their exposure to more troubled borrowers.
Oil and gas producers with bonds trading with double-digit yields include California Resources Corp.(NYSE: CRC), Range Resources Corp.(NYSE: RRC), Southwestern Energy Co. (NYSE: SWN), Antero Resources Corp.(NYSE: AR.), Comstock Resources Inc.(NYSE: CRK), Extraction Oil & Gas Inc. (NASDAQ: XOG) and Oasis Petroleum Inc. (NASDAQ: OAS).
Meanwhile, oilfield services and drilling companies have some of the most high-risk debt, with junk-rated companies accounting for 65% of the $32B debt tab by the sector. Of these companies, Transocean (NYSE: RIG) has $4.3B; Valaris (NYSE: VAL) has $1.8B, Nabors Industries (NYSE: NBR) owes $1.4B, and Superior Energy Services (NYSE: SPN) has $1.3B of debt set to mature within the next two years as per Moody's.
With perennially weak commodity prices, falling demand, shuttered capital markets, and the coronavirus dampening global economic growth, there probably won't be much respite for the cash-starved shale sector, which could see more than 20% reduction in available lending.
You can also expect lenders to be much more stringent about making borrowers hedge their production and much less willing to grant standard covenants and fairly generic reserve-based loan terms given the scale of asset impairment that is about to hit the shale industry.
By Alex Kimani for Oilprice.com
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