Oil and gas companies struggling with low commodity prices continue to drive up the U.S. speculative grade default rate, which is projected to hit a four-year high of 3.8% in 2016, according to a recent report from Moody’s Investors Service.

Moody’s said that of the the 13 defaults in 3Q2015, five were oil and gas companies, including four in exploration and production (E&P) and one in oil services. The oil and gas companies defaulting in the third quarter were Black Elk Energy Offshore Operations, Goodrich Petroleum Corp., Hercules Offshore, Samson Investment Co. and SandRidge Energy.

The 13 defaults in 3Q2015 marked a drop from 16 defaults the previous quarter, but the 38 defaults through the first nine months of 2015 already exceeds the 25 total defaults in 2014. Seven of the 16 2Q2015 defaults were E&P companies.

“Oil and gas companies continue to exert the greatest upward default rate pressure,” the Moody’s report said. “The sector accounted for 14 of the 38 defaults in the first nine months of the year, far eclipsing the two oil and gas defaults for all of 2014.”

For much of 2015, Moody’s and other firms have tracked an increase in default risk among oil and gas companies coinciding with sustained low commodity prices (see Shale Daily, March 30, May 20, July 31). The risk of default among speculative-grade oil and gas companies continues trending upward as prices remain depressed.

The report noted that “after good credit market access earlier in the year allowed oil and gas companies to complete distressed exchanges, the pull-back in oil prices over recent months is increasing investor risk aversion and curtailing new debt offerings” leading to more bankruptcies.

Based on Moody’s Liquidity Stress Index (LSI) for speculative-grade issuers, designed as a leading indicator of default rate trends, the stress on the oil and gas industry is markedly higher than on other sectors.

“As the fallout from the sharp drop in energy prices weakens earnings and cash flow, oil and gas companies account for a large share of companies at elevated default risk because of weak liquidity and low ratings,” the report said. “Following a drop in oil prices from a peak of nearly $108/bbl during June 2014, the oil and gas LSI has climbed from 3.8% to 16.9% as of September 2015, which is the highest level since July 2009. However, the 2.8% LSI excluding oil and gas remains near its 2.6% record low and has actually fallen over the last year.”

The trend continued in October, with the oil and gas LSI climbing even further to 19.2%.

“While our key liquidity indices suggest that risks are rising and the default rate should increase over the next year, they remain below crisis levels,” Moody’s Corporate Finance Group Senior Vice President John Puchalla said, alluding to relatively low liquidity stress outside the energy sector.