Friday, May 27, 2022

Default warning as US energy sector financial difficulties persist

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Defaults by U.S. oil and gas producers are set to outperform all other sectors again in 2021, as an industry hit by this year’s price drop faces even more pain, agency forecast says rating.

Energy will represent between $ 15 billion and $ 18 billion in defaults on U.S. high yield bonds in 2021, Fitch predicted. That’s more than double for both healthcare and industry, the next most affected sectors, the rating agency said.

The volume will be well below the $ 48 billion accumulated by energy companies over the past year, which, at 41% of the total, was also by far the largest of any industry. But the persistence of high levels of distress will dash any hopes for a respite for the industry after one of its most difficult years in recent history.

“Low crude oil prices coupled with accessible financial markets will likely hamper many weaker energy emitters in 2021,” said Eric Rosenthal, senior director of leveraged finance at Fitch.

The default rate in the energy sector is expected to be 7-8% next year, according to Fitch, up from more than 15% in the past 12 months – the highest since 2017 – but well above the historic average of 4.4 percent.

The US oil industry was rocked in 2020 after the Covid-19 pandemic crippled global demand, as the market was inundated with Saudi crude.

Producers were forced to cut spending, close wells and lay off workers, and declining production further depressed cash flow, leaving operators with less money to repay debt. High level casualties included Chesapeake and Whiting.

Service providers have been hit particularly hard, as operator cuts left them out of work.

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By the end of November, 43 producers and 54 service providers had hit the wall, according to Texas law firm Haynes and Boone – although the pace has slowed in the final months of the year.

“It was a monumental weight of debt that was in jeopardy and is being resolved in these bankruptcies,” said Charles Beckham, partner at Haynes and Boone, adding that service providers were particularly vulnerable to bankruptcy in 2021.

Oil companies feature high on rating agency default watch lists. Fitch’s “First Order Bonds” are 35% energy groups. Most of those on the list are small producers such as Gran Tierra Energy and Northern Oil and Gas, with yields in the range of 25,000 to 30,000 barrels per day.

Persistently low oil prices will weigh on the ability of companies to make payments throughout 2021, analysts say. Moody’s, another rating agency, predicted WTI would stay close to $ 45 a barrel in the coming year – too low for most producers to provide reasonable returns.

Access to financial markets would remain poor, Moody’s added, limiting refinancing options and keeping default risk high.

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