Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Oil companies brace for big wave of debt defaults

Don't go bottom fishing in energy...yet: Pro
Don't go bottom fishing in energy...yet: Pro

Low oil prices are leaving many oil and gas companies with difficult debt loads, causing them to default at an extraordinary rate.

On top of that, rating firm Moody's forecasts the default rate will increase.

"The energy sector remains the most troubled, accounting for almost a quarter of the 79 defaults so far this year," said Sharon Ou, Moody's Credit Policy Research senior credit officer.

The strain on the oil patch comes after years of borrowing heavily at the start of the domestic energy renaissance.

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At the time, oil was hovering around $100 a barrel. But now, with West Texas Intermediate crude oil slightly above $40 a barrel, these companies are seeing their revenue dry up — and remain saddled with debt.

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Marc Lasry, the chief executive of distressed investing specialist Avenue Capital Group, said these energy companies boosted their borrowings to between $250 billion and $300 billion, compared with the $100 billion at the start of this year.

The energy boom of the past decade was fueled by a wave of credit from U.S. banks that now say they expect more delinquencies and charge-offs from energy companies this year.

Federal Reserve officials earlier in November noted an increase in weakness among credits related to oil and gas exploration, production, and energy services following the decline in energy prices since mid-2014.

Among the major banks raising red flags about the health of the loans are Wells Fargo, Bank of America and JPMorgan Chase.

Some banks are renegotiating their credit lines to gas and oil companies, while others are cutting credit lines to oil and gas firms and are requiring more collateral to protect against the surge of defaults.

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Of the 31 companies that have disclosed information on loan resets so far, banks have cut credit lines of 10 firms by just over $1.1 billion, Reuters reported.

Some energy companies are aggressively looking to take matters into their own hands to alleviate the debt pressure. Some are selling assets, others are cutting spending, some are issuing new shares, and others are hedging their oil production at a certain price.

Some, however, can't escape the grip of debt, falling victim to low oil prices and filing for bankruptcy.