Whether it’s the number of bankruptcies or the recovery rates for creditors that serve the oil and gas sector, the industry may be facing a downturn not seen since the telecoms sector collapse in the early 2000s.
"The jump in oil and gas defaults that was driven by slumping commodity prices, was primarily responsible for the increase in the overall U.S. default rate in 2015 and continues to fuel it in 2016," said David Keisman, senior vice president at Moody's Investors Service. "When all the data is in, including 2016 bankruptcies, it may very well turn out that this oil and gas industry crisis has created a segment-wide bust of historic proportions."
Moody’s recorded 17 oil and gas bankruptcies in 2015, including 15 from the exploration and production (E&P) segment, one from oilfield services and another from drilling, the ratings agency found. This year, bankruptcies in E&P have accelerated at twice the rate, year-to-date, than they did for all of 2015. To compare the industry to the telecom sector’s troubles, Moody’s found 43 company bankruptcies in that industry from 2001 to 2003.
Firm-wide recover rates for E&P bankruptcies are also troubling: In 2015, the average was just 21%, less than half the historical average of 58.6% for all E&P bankruptcies filed prior to 2015 and the overall historic average of 50.8% for all types of corporations that filed for bankruptcy from 1987 to 2015, Moody’s said. Reserve-based loans recovered, on average, 81%, well below the 98% recovered in previous energy E&P bankruptcies from 1987 to 2014. High yield bonds recovered some 6% compared to the low 30% range in prior E&P bankruptcies. Further, more than half of the E&P companies that completed distressed exchanges to ward away bankruptcies wound up filing for Chapter 11 protection within a year.
- Nicholas Stern, editorial associate