MOODY'S OIL DEFAULTS
So far oil and gas companies have largely weathered the sharp drop in oil prices with minimal carnage. But that carnage is coming, according to a new report from Moody's Investors Service.
Analysts at Moody's predict that the default rate for oil and gas companies with lower credit ratings — B2 or lower — could increase to 7.4% by March 2016 from 2.7%.
Moody's Senior Vice President David Keisman said in the report that even if energy prices recover gradually to roughly $70 to $75 per barrel in 2016, the "weaker oil & gas issuers" will still be positioned for a "much greater risk of default."
Oil and gas companies have already seen a swift drop in their credit ratings, Moody's said. As of May 1, 2015, these firms accounted for 14.8% of all the companies covered by Moody's with credit ratings of B3 or lower, up from 8% the prior year.
And Moody's admits that its predictions of a rebound to $70 to $75 per barrel oil could prove to be optimistic. Analysts' estimates for where oil prices will move vary widely. Oil prices have risen 30% from a near six-year low hit in March, yet the U.S. oil benchmark has dropped in the past six trading sessions by nearly 6%.
Independent exploration and production companies should have the most trouble in the coming year, as they are typically smaller in size and more reliant on outsize capital spending to replenish their reserves, Moody's wrote. "In times of weak commodity prices, these companies have a higher reliance on borrowings under their credit facilities and external financing sources."
Refiners, by contrast, are better positioned to survive the volatility in oil prices because business is not directly tied to the price of oil.
Moody's predicts that overall oil and gas companies with stronger balance sheets will prevail in the coming years, while weaker comes will see their troubles increase substantially. "The current environment for US oil & gas companies has evolved from a story of an entire industry sector at risk to a more nuanced story of risk migrating to the weakest," Moody's said.
Moody's pointed out the good news even in a potential default scenario for lenders to oil and gas companies is that bank lenders have seen nearly full recoveries in bankruptcy scenarios.
Quicksilver Resources Inc. and American Eagle Energy Corp. both filed for Chapter 11 bankruptcy protection in recent months.
So far neither predictions of widespread defaults in oil and gas junk bonds nor cataclysms these defaults might cause in the junk bond market have come to pass.
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