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The Trojan Horse In Oil Markets

Iran sanctions have been at…

Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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The End Of The Oil And Gas Bankruptcy Wave

Even as oil prices are rebounding, we are closing out one of the worst years for the oil and gas industry in decades. In 2016, the U.S. oil and gas industry defaulted on $39 billion in high-yield energy debt, more than twice as much as the $15 billion in defaulted debt in 2015, according to Fitch.

Many oil and gas companies were able to weather the storm at the end of 2014 and for much of 2015, only to run out of room this year. According to Fitch, one in three U.S. oil and gas exploration companies defaulted on high-yield bonds in 2016. Taking a broader measure of energy companies rather than just oil and gas, one in five companies defaulted on high-yield debt. That stands in stark contrast to the less than 1 percent of energy companies that defaulted in 2014.

But it isn’t just U.S. companies. Fitch points to Venezuela’s state-owned PDVSA, which has $13 billion in high-yield debt that is probably most in danger of default. PDVSA has seen production drop and has been raided by the Venezuelan government. With both the sovereign and the company essentially broke, it could be a matter of time before a default arrives. PDVSA succeeded a few months ago in convincing creditors to extend maturity terms on some of its bonds, buying it a bit of breathing room.

Related: Natural Gas Drillers Rush To Hedge Production As Prices Soar

A few other noteworthy bonds that are in shaky territory include Brazil’s Odebrecht Offshore Drilling, which has $3 billion in outstanding debt; California Resources Corp., which has $2.8 billion; and FTS International, a well completion company based in Texas, which has $800 million in high-yield debt.

While 2016 was a horrific year for the high-yield sector, Fitch says that 2017 will be much better. Rising oil prices will keep most companies out of danger. Fitch projects just a 3 percent default rate.

The rebound across the oil and gas industry is still in its infancy, but there are positive signs that the sector is on the mend. With just a few days left in December, only two upstream North American energy companies have declared bankruptcy, the lowest number since the beginning of 2016. According to Haynes & Boone, a Dallas-based law firm, more than 220 upstream and oilfield service companies have declared bankruptcy since the start of the downturn in 2014; but two-thirds of those came this year.

“The worst is over with oil prices moving up. Prospects are a lot better than they were a year ago,” Eric Rosenthal, an analyst at Fitch Ratings, said in a report. “The recovery of oil prices probably saved a few of them.”

By Charles Kennedy of Oilprice.com

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