The oil price crash is taking a growing financial toll on companies throughout the industry, forcing some into bankruptcy and others to issue expensive junk bonds to stay afloat.
On Tuesday, shale producer Quicksilver Resources Inc filed for bankruptcy protection for its US operations after missing a bond payment. Earlier bankruptcies include a March 3 filing by Cal Dive International Inc, which installs offshore pipelines and platforms.
Energy firms are now the top issuers, by a wide margin, of junk bonds, which require them to pay much higher yields than conventional bonds. On March 5, US Gulf Coast producer Energy XXI Ltd issued US$1.45 billion in bonds that pay a steep 11 percent, planning to use the money in part to pay other lenders.
Energy XXI had previously warned it would not be able to make payments if commodity prices stay low.
The par value of high-yield energy company bonds on the market surged by about US$30 billion in the first two months of the year, representing both new issues and downgrades.
That was far more than any other sector, according to Fitch Ratings. The rise in junk bonds and bankruptcies are the latest sign of stress in the petroleum sector as US crude prices linger about US$45 a barrel, down nearly 60 percent since June last year.
Low prices depress profits and pinch balance sheets, particularly for smaller companies, which can be heavily leveraged.
That is forcing more of them to go to capital markets to stay afloat.
“It is definitely a challenging environment all around for a smaller [lower-rated] name to get a deal done,” Fitch senior director for energy Mark Sadeghian said.
The number of companies closing their doors is still limited. However, the climate is set to get tougher still if the downturn in the crude price lasts years.
“You need oil prices to be lower for longer before you see a tidal wave of bankruptcies,” Tudor, Pickering, Holt managing director David Pursell said.
One wrinkle is that to continue to win financing, companies have to keep producing and selling oil, which keeps downward pressure on crude prices.
The International Energy Agency last week warned that, despite the sharp fall in crude prices, US supply “so far shows precious little sign of slowing down.”
Some companies are seeking fresh financing to meet existing loan and bond payments. In other cases, companies are trying to be proactive and keep liquidity high in case the market gets worse.
Some energy firms have turned to new equity offerings for funds, a move that dilutes the shareholder base and comes as stock valuations are already low.
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