Bankruptcies In The Oil Patch Loom, Distress Debt Coming Due Fast

Bankruptcies In The Oil Patch Loom, Distress Debt Coming Due Fast

$OIL, $USO, $GS, $CVX, $XOM

At a time when the price of Crude Oil price is at its lowest marks in 6 years, producers need to find half a trillion dollars to repay debt. Many will not make it.

The number of Oil & Gas company bonds with yields of 10% or more, a sign of distress, 3X’d in the past year, leaving 168 firms in North America, Europe and Asia holding the debt. The ratio of net debt to earnings is the highest in about 20 yrs

If Crude Oil stays at about 40 bbl, the shakeout will be profound, now think of the problems and 30 and below, say to the 1998 low at about 17 bbl (adjusted for inflation 22)

WTI Crude Oil finished +10.85% to 42.79 bbl at 3.59p in New York Thursday.

The look and shape of the Oil industry will change over the next 5 to 10 years as companies emerge from the deep dive in prices, and if prices stay at these and lower marks, the number of bankruptcies and distress deals will multiply.

Debt repayments will increase for the rest of the decade, with $72-B maturing this year, about $85-B in Y 2016 and $129-B in Y 2017, according to the data. About $550-B in bonds and loans are due for repayment over the next 5 years.

US drillers account for 20% of the debt due in Y 2015, Chinese companies rank 2nd with 12% and UK producers represent 9%.

In the US, the number of bonds yielding greater than 10% has increased more than 4-fold to 80 over the past year, according to the data.

Diving Crude Oil prices are diminishing the value of Oil reserves and reducing borrowing power, even as pressure builds to find replacement fields.

Some earnings metrics are already breaching the lows of the Y 2008 financial crisis.

The profit margin for the 108-member MSCI World Energy Sector Index, which includes Exxon Mobil Corp (NYSE:XOM). and Chevron Corp.(NYSE:CVX), is the lowest since Y 1995, the earliest for when data is available.

Some US producers got breathing room by leveraging their low-cost assets to raise funds earlier this year and repay debt, Goldman Sachs Group Inc (NYSE:GS). wrote in a 6 August report. This helped companies shore up their capital and reduce debt-servicing costs.

That may stop being an an option because energy companies have been the worst performers in the past year among 10 industry groups in the MSCI World Index.

Credit-rating downgrades are putting more strain on the ability of Oil companies to raise money cheaply.

The biggest companies, those with global portfolios that span Oil fields to refineries, will probably emerge largely intact from the slump. Smaller players, dependent on fewer assets, will have problems.

Those companies with debt to pay have 1-eye focused on Crude Oil prices. With revenues collapsing and debt maturing fast, a growing number of companies will find themselves unable to meet repayment schedules. Bankruptcies in the Oil Patch loom.

Stay tuned…

HeffX-LTN

Paul Ebeling

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