Across the North American oil patch, the 2014 oil bust is still playing out. For outsiders, it may look as if the crash is now over and companies are starting the recovery process. However, depressed oil prices are still wreaking havoc in the North American oil industry.
The most recent tally of oil patch bankruptcies is $66.5 billion, according to law firm Haynes and Boone LP’s Oil Patch Bankruptcy Monitor. But this tally only includes exploration and production companies, oil service companies and those enterprises that provide ancillary services to the industry are excluded from the Oil Patch Bankruptcy Monitor.
According to credit rating agency Moody’s the default rates for oil and gas and metals and mining had soared to 14.1% and 12.8%, respectively, at the beginning of this year, which pulled up the average overall US spec-grade default rate in 2015 and continues to fuel it in 2016. Excluding oil and gas and metals and mining, the overall 12-month trailing spec-grade default rate in the US actually dipped to 1.7% as of January 1, 2016, from 1.9% at the start of 2015.
There is no other way of putting it, the oil and gas sector is on fire and even in bankruptcy creditors are struggling to restructure firms in such a way as to get their hands on what’s due.
Oil Crash Is Worse Than Dot-Com Bust
According to a new report from Moody’s Investors service, recovery rates for 15 US E&P bankruptcies averaged a “catastrophic” 21% last year, well below the historical average 59%. Senior unsecured bondholders were the most affected with recoveries averaging just six cents on the dollar. Moody’s goes on to state that, collectively, the oil patch bankruptcy debacle could be worse than the telecom industry’s collapse in the early 2000s, measured by the number of companies that go to the wall. That said, Reuters reported earlier in the year that after a surge in oil patch bankruptcies during the first quarter the number of North American energy bankruptcies was closing in on the record 68 bankruptcy filings for one industry seen during the depths of the telecom bust of 2002 and 2003. Since the beginning of 2015, Haynes and Boone has tracked 90 North American oil and gas producers that have filed for bankruptcy. So it is clear that the oil patch debacle is already as bad as the telecoms disaster at the turn of the century.
According to Moody’s, creditors across the board are struggling to get back what is owed from collapsed oil groups. Recovery rates of debt issued as part of borrowing base revolvers, loans backed by oil and gas reserves, averaged 81% during 2015, significantly short of the historical average of 98%.
The low recovery rates may have come as a huge surprise to those investors who bet on E&P debt as a distressed play. According to Moody’s, the E&P sector within the oil & gas industry has historically had an above average recovery rate. During the previous default cycles, unsecured E&P creditors, on average, reported recoveries of around 34% as noted above, this time, it has been different — significantly different. Part of the problem is diminishing reserve values. Reserve values are being cut disproportionately due to uneconomic reserves at low commodity prices. Therefore creditors have found assets literally disappearing in front of their eyes.
E&P bankruptcies are already about twice 2015’s total so far this year. Creditors should expect more pain ahead.
By Rupert Hargreaves