Low oil prices are endangering an increasing number of exploration and production companies.
According to a new report from Moody’s Investors Service, the oil and gas industry could see the rate of defaults rise over the next year. The companies in danger of going belly up, not surprisingly, are the ones that already have low credit ratings. Moody’s finds that the default rate for oil drillers with a credit rating of B2 or lower could jump from 2.7% to 7.4% by March 2016.
Moreover, distressed oil companies make up a rising share of overall firms with a poor credit rating – roughly 14.8% of the companies with a B3 credit rating or worse covered by Moody’s are in oil and gas. That is up sharply from the 8% share that oil firms accounted for in 2014.
The credit ratings agency also said that even if oil prices rise to $70 or $75 per barrel, the weakest firms probably won’t be safe. Debt is piling up and banks are starting to restrict capital to drillers that are in the most trouble.
Even worse is the fact that there is no certainty that oil prices will rise. Goldman Sachsjust predicted that oil prices will fall once again to $45 per barrel. High levels of crude oil inventories and only a slight fall in production thus far likely mean that the glut will persist.
More importantly, efficiency gains have lowered the breakeven price for a barrel of crude, meaning that fewer drillers will cut back than the markets had previously expected. With several companies willing to put rigs back into action soon, oil prices have likely topped off for now.
That means that struggling upstream producers may have survived this long, but the clock could run out in the coming months. In April, credit lines were cut to some of the most distressed. In October, another reevaluation of credit access will take place, at which point, more companies could see their funding dry up.
So far we have seen Quicksilver Resources, American Eagle Energy, BPZ Resources, and WBH Energy file for Chapter 11 bankruptcy protection. If the Moody’s report is any indication, they won’t be the last.