According to the Federal Reserve Bank of Dallas, oil and gas company bankruptcies have hit a quarterly level last since during the Great Recession, as at least nine companies filed for bankruptcy representing $2 billion in debt.
It is no secret that industry professionals and economists have underestimated the severity of low oil prices, but distressed companies that are levered with debt will begin to either file for bankruptcy or look for buyers.
In “That’s Fracking Absurd!: The Fed Does Create Bubbles,” there was a relationship between the Federal Reserve’s easy money policies and explosion in oil industry debt loads. For instance, Continental Resources Inc. put the Bakken Shale oilfields on the map, but it came at a price. Continental pays almost as much interest on debt as Exxon Mobile but is 20 times smaller.
Last September, Dr. Ellen R. Wald, expressed that it was a matter of time before shale companies run into trouble. Canadian producers are no different, potentially worse (here and here).
The Wall Street Journal indicates that, excluding Exxon and Chevron, the total debt for E&Ps have ballooned to $200 billion in 2014. Moreover, data from law firm Haynes and Boone show that 36 E&P companies have filed for bankruptcy in 2015 (Market Realist).
According to Forbes, Swift Energy, Halcón Resourcs, Energy XXI and Goodrich Petroleum could file bankruptcy due to their high debt. All have lost at least 90 percent of their market capital.
In “Crude’s Carnage to Continue And Break the 2009 Low,” I mentioned the significant widening in high-yield credit spreads during the end of 2014, which signaled significant stress in credit markets.
It has only gotten worse with energy sector junk-rated bonds trading roughly 35 percent below par, second only to the mining and metals industry (MorningStar/BoA Merrill Lynch High Yield Index).
If contagion spreads, which I’ve been forecasting for at least a year, oil production could see a decline. This could help elevate prices if OPEC pairs back production and other U.S. companies do not pick up the slack.
Consolidation will ultimately be a positive for the industry.