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Fitch Says Recent E&P Bankruptcies Push Default Rate to Record 27%

Four recent bankruptcy filings by exploration and production (E&P) companies have pushed the trailing 12-month (TTM) U.S. high-yield (HY) bond default for E&Ps to a record 27%, while the TTM default rate for the energy sector is approaching 14%, according to Fitch Ratings Service.

Last Monday, SandRidge Energy Inc. and Breitburn Energy Partners LP voluntarily filed separately for Chapter 11 bankruptcy protection (see Shale DailyMay 16). That proceeded two additional E&P bankruptcy filings by Linn Energy LLC and Penn Virginia Corp. (see Shale DailyMay 12).

Fitch said the four filings -- and many others -- had pushed the TTM default rate to a record 27%, and repeated the projection it made last March that the rate in the E&P subsector would hit 30-35% by the end of 2016 (see Shale DailyMarch 17). For the overall energy sector, Fitch predicts the TTM default rate will surpass 20% in 2016.

"With the latest round of energy defaults completed, the big question is how many more bankruptcies will occur this year," Eric Rosenthal, Fitch senior director for leveraged finance, said Wednesday. "The answer is probably quite a few."

Although not cited by Fitch, another E&P company, Halcon Resources Corp., filed for Chapter 11 last Wednesday (see Shale Daily, May 19).

Fitch added that two E&Ps -- Seventy Seven Energy Inc. and Lightstream Resources Ltd. -- were both near-term default candidates, and that filings by those companies would push the E&P default rate even higher.

Seventy Seven is the onshore oilfield services business spun off from Chesapeake Energy Corp. in July 2014 (see Shale Daily,July 1, 2014).

In a 33-page report released Wednesday, Fitch said the TTM default rate for the energy sector was 10.7% in April. By comparison, it was 7.2% in April 2015. For the latest report, only two sectors of the economy -- metals and mining (20.2%), and textiles and furniture (11.4%) -- had higher TTM default rates.

Fitch said the energy sector has so far recorded $26 billion in defaults in 2016. "The high watermark set for energy defaults in 2015 has already been surpassed in the first four-plus months of this year," Rosenthal said.

According to Fitch, HY bond volume picked up in March and April, at $21.8 billion and $20.3 billion, respectively. But the ratings service added that only $62.6 billion of new issuance had occurred during the first four months of 2016, compared to $119.9 billion during the first four months of 2015. In the energy sector, $2.4 billion in bonds had been issued during the first four months of 2016, compared to $18.7 billion during the same time frame in 2015.

Fitch added that distressed debt exchanges (DDE) accounted for 41% of defaults on a TTM issuer basis through May. Since 2015, energy companies that completed a DDE but then subsequently defaulted includes Halcon, SandRidge, Venoco Inc., Midstates Petroleum Inc., Warren Resources Inc., American Energy-Woodford LLC, Goodrich Petroleum Inc., Exco Resources Inc., Comstock Resources Inc. and Rex Energy Inc.

Moody's Investors Service reported in April that the liquidity stress index among oil and gas companies had reached a new record high in March at 31.6% (see Shale Daily,April 5). Earlier this month, Moody's said it expected more defaults in 2016 within the E&P sector.

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