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U.S. E&P Default Rate Now Rivaling Telecom Bust, Moody's Says

The oil and natural gas bust beginning in 2015 was worse than many thought, fueling a spike in the U.S. default rate that rivaled the telecom industry collapse in the early 2000s, both in recorded bankruptcies and low creditor recoveries, Moody's Investor Service said.

Slumping crude oil and depressed natural gas prices took a severe toll on oil & gas companies, fueling a spike in the corporate default rate that is continuing this year, said Senior Vice President David Keisman. He and his colleagues compiled "Lessons Learned from the 2015 Oil Bust," in a review of 15 exploration and production (E&P) bankruptcies with at least $100 million of debt.

"Focusing on industries with greater than 10 bankruptcies in a given year between 1987-2015, it is evident that the ongoing oil and gas bust may very well rank alongside the 2001-2002 telecom bust, both in terms of number of recorded bankruptcies and the really poor firm-wide recoveries for creditors," Keisman said. "Although outside the scope of this report, it is worth noting that E&P bankruptcies have accelerated in 2016, with the number year-to-date about twice the figure for the all of 2015."

Firm-wide recovery rates of the 15 E&P bankruptcies that were reviewed from 2015 averaged 21%, significantly lower than the historical average of 58.6% for all E&P bankruptcies filed prior to 2015, and the overall average of 50.8% for all types of corporations that filed for bankruptcy protection between 1987-2015.

The recovery rates of the 15 E&P bankruptcies reviewed were "catastrophic compared with the historical average of 58.6% for all recorded E&P bankruptcies filed prior to 2015," Keisman and his colleagues said.

Loans backed by reserves were not damaged, but not nearly as much. Reserve-backed loans (RBL) performed relatively well, compared to other debt, but the average recovery of 81.1% "significantly underperformed the average for RBLs in prior E&P bankruptcies of 98.1%, and came in spite of the presence of substantial debt cushions for the loans."

Distressed exchanges undertaken last year also failed to prevent bankruptcies.

"More than half of the E&P companies that completed distressed exchanges (DE) -- often exchanging unsecured bonds for new secured debt at a significant discount, in an attempt to mend unsustainable capital structures -- filed Chapter 11 bankruptcy within a year," Keisman said. "It remains to be seen if the 2015 DEs that didn't stave off bankruptcies will help creditors realize better recoveries on their debt holdings, since historically DEs followed by bankruptcy have done worse."

Moody's is predicting "more of the same for E&Ps in 2016."

While bankruptcies filed in early 2015 typically involved less debt, because the larger E&Ps were able to survive the initial oil price shock, the accelerated downturn has sent more operators over the cliff.

"The 2016 year-to-date figure within our rated universe is about twice 2015’s total," Keisman noted.

Among the E&Ps that filed for protection this year and have or are set to emerge is SandRidge Energy Inc., which said Monday its reorganization plan has received "overwhelming support" from stakeholders and been confirmed by a Texas bankruptcy court (see Shale DailySept. 12). The former Atlas Resources Partners LP, now Titan Energy LLC, also climbed out from under earlier this month, while Sabine Oil & Gas Corp. navigated the process and has become a private player (see Shale DailySept. 8Aug. 15). Magnum Hunter Resources Corp., which also filed for Chapter 11 early this year, reemerged after ousting CEO and founder, Gary Evans (see Shale Daily,May 11).

The increase in E&P defaults, along with other commodity-related sector defaults, primarily was responsible for an increase in the overall U.S. speculative (spec) grade default rate in 2015 and that trend continues this year, according to Moody's. Excluding the oil/gas and metals/mining sectors, the overall 12-month trailing spec-grade default rate in the U.S. actually dipped to 1.7% as of January 1, 2016, from 1.9% at the start of 2015.

In contrast, the default rate for oil/gas climbed to 14.1%, while for metals/mining it jumped to 12.8% at the beginning of this year.

"The default rate in these battered commodity-related sectors kept climbing through the first half of 2016 to 25.3% for oil/gas and 18.5% for metals/mining, and the overall default rate excluding them rose to 2.3%."

Up until the defaults last year, there had been nothing significant in the oil and gas sector since 2009, according to Keisman.

"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 in terms of the number of defaults in the same industry segment, coupled with poor firm-wide recovery rates compared with historical averages."

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