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Key Financial Lifelines Slipping Away For Some E&Ps, Fitch Says

Distressed debt exchanges, a lifeline used since last spring by many struggling natural gas and oil producers, may no longer be a viable alternative to prevent being swept away by washed out commodity prices, according to Fitch Ratings.

The most recent energy defaults have involved missed interest payments, while four more are slated for later this month or in April, including Chaparral Energy Inc., Linn Energy LLC and Energy XXI Inc., credit analysts said Thursday.

“Moreover, a few outstanding distressed debt exchanges (DDE) are struggling in the market, perhaps signaling that smaller-scope DDEs are now unable to buy time for companies in the lower-for-longer oil price environment,” analysts said.

"We've reached a point in the current lower-for-longer environment where smaller-scope DDEs might not be sufficient anymore to buy time for the weaker energy companies," said Fitch’s Eric Rosenthal, senior director of leveraged finance.

Linn Energy warned Tuesday that bankruptcy may be unavoidable because of the continuing drain on finances from low commodity prices (see Shale Daily, March 15). Offshore producer Energy XXI also has warned that it may file for bankruptcy. Per Fitch, exploration and production (E&P) company defaults in the pipeline as of Wednesday (March 16) also include Warren Resources Inc. and Goodrich Petroleum Corp. (see Shale Daily, March 14; Jan. 14).

Even though crude oil prices have advanced by about $10/bbl since Feb. 11, the bids on bonds for weaker E&Ps have failed to gain much traction in the secondary market. Fitch estimated that $71 billion of non-defaulted energy bonds are bid below 50 cents.

Fitch now expects the trailing 12-month (TTM) default rate to end March at about 3%, with defaults expected to continue. Fitch is forecasting the energy sector TTM default rate to surpass 20% this year.               

The March energy TTM default rate is above 8% and nearing the 9.7% mark seen in 1999, when oil prices averaged $19/bbl. The TTM March E&P subsector default rate is roughly 14%. Fitch is projecting the 2016 E&P default rate at 30-35%.

“Overall, Fitch projects just under $90 billion in 2016 defaults, which would be the third highest on record,” behind $110 billion in 2002 and $119 billion tallied in 2009.

Energy bond default volume since the start of this year totals $6 billion, with another $9 billion slated over the next month, compared to a total $17.5 billion for full-year 2015. Roughly $40 billion of additional outstanding energy bond debt is forecast to default this year.

During February, there were “nearly $33 billion of fallen angels in the energy sector, pushing the high-yield (HY) market up to $282 billion,” Fitch said. As a result, energy now comprises 19% of the HY market, up 2% from January, which is the largest percentage for one sector since telecommunications in June 2002.

In February, nearly $33 billion of investment-grade energy companies were downgraded into HY, pushing the market size to $282 billion

HY energy new issuance has been light in the past six months at about $6.2 billion, excluding some DDEs. The lack of capital markets access over the past year “has been a pain point for struggling energy companies, making it more difficult to stave off bankruptcies.”

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