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Energy Woes Still Driving Up Speculative-Grade Default Rate, Moody’s Finds

Struggling energy companies continue to put upward pressure on U.S. and global speculative grade default rates, according to a recent report from Moody’s Investors Service.

According to Moody’s, the global speculative-grade default rate was 2.7% in October, an increase from September’s upward revised rate of 2.6%.

Of 79 defaults this year among Moody’s-rated corporate debt issuers around the world, nearly a quarter were from the energy sector, Moody’s said.

Moody’s has tracked growing pressure on oil and gas companies this year as commodity prices have remained persistently low (see Shale Daily, Sept. 4, Nov. 3).

Since last year, the agency’s Liquidity Stress Index (LSI) for oil and gas companies has increased sharply, measuring noticeably higher than the overall LSI. The oil and gas LSI has increased from 3.8% in June 2014 to 16.9% in September, according to Moody’s. That compares to 2.8% LSI excluding oil and gas in September.

“We expect the global speculative-grade default rate to close this year at 3% and slowly rising to 3.4% by October 2016,” Moody’s said. “The credit market has seen some volatility recently reflecting investors’ concern about the impact of a potential interest rate action by the Fed on the global economy, not to mention the ongoing commodity price deflation.”

The U.S. speculative-grade default rate stood at 2.8% in October, up from September’s 2.7% and up from 1.7% in the year-ago period. In Europe, the rate increased from 2.1% in September to 2.4% in October, compared to the year-ago rate of 2.2%.

Moody’s expects the U.S. speculative-grade default rate to reach 3.3% by year’s end.

“By industry, Moody’s expects default rates to be highest in the metals and mining sector in the United States, followed by oil and gas,” Moody’s said. “In Europe, default rate is expected to be highest for oil and gas companies.”

The Moody’s report identifies EXCO Resources Inc. and Warren Resources Inc. as the most recent energy sector defaults, noting that both exploration and production (E&P) companies completed distressed exchanges in October.

On Monday, EXCO announced that 86% of its shareholders had voted in favor of an amendment to effect a reverse share split. But according to a press release, the Dallas-based E&P’s board opted to “defer any decision on whether or not to effect a reverse share split as the company has regained compliance with the New York Stock Exchange’s continued listing standards.”

Since last month, EXCO has been taking steps to increase its financial flexibility and boost liquidity (see Shale Daily, Oct. 30).

In its third quarter earnings, the company reported a net loss of $354.5 million (minus $1.30/share), including $339.4 million in impairments on its oil and natural gas properties. Year/year, the company’s total production declined 5% to 31.3 Bcfe, down from 33 Bcfe in 3Q2014.

Warren also announced steps to increase liquidity in its third quarter earnings report. This came after the E&P revealed that it would be moving its headquarters from New York to Denver partly in an effort to cut general and administrative expenses (see Shale Daily, Oct. 1).

For the third quarter, Warren reported a net loss of $189.5 million (minus $2.29/share), including $175.7 million in impairments. Warren’s quarterly production increased year/year to 8.75 Bcfe, up from 7.1 Bcfe in 3Q2014.

After opening at $1.07, EXCO shares closed Tuesday at $1.02. Warren’s shares ended the day trading at 32 cents after opening at 35 cents/share.

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