Great American Oil Bust Rages on; Defaults, Bankruptcies Soar

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How much worse is 2016 than 2015?

Junk bonds, trading like stocks since February, have skyrocketed and yields have plunged. But that doesn’t mean the bloodletting is over.

The trailing 12-month US high-yield bond default rate jumped to 4.9% at the end of June, the highest since May 2010 as the Financial Crisis was winding down, Fitch Ratings reported today. The first-half total of $50.2 billion of defaults already exceeds the $48.3 billion for the entire year 2015.

Energy companies accounted for 56% of those defaults. The energy sector default rate shot up to 15%. Within it, the default rate of the Exploration & Production (E&P) sub-sector soared to 29%!

And the default party isn’t over: “Despite the run-up in prices since the February trough, there will be additional sector defaults, with Halcon Resources expected to file imminently,” Fitch reported.

Issuance of junk bonds in the first half has plunged 34% from a year ago, to $120.5 billion, according to the Securities Industry and Financial Markets Association (SIFMA), as junk-rated energy companies are having one heck of a time borrowing money and issuing bonds. The fact that investors – who’ve now been burned for nearly two years – are reluctant to extend new credit to teetering oil & gas companies precipitates their default and bankruptcy. Fitch:

“The combination of high energy and metals/mining default rates and lower year to date issuance has been a one-two punch for the high yield bond market this year,” said Eric Rosenthal, Senior Director of Leveraged Finance. “The question going forward is whether macro events will disrupt markets and restrain issuance for the remainder of the year.”

So oil prices have surged from their low earlier this year, though they bounced off the apparent ceiling of just over $50 a barrel. Natural gas prices too have surged. Yet, four more E&P companies with $1.5 billion in combined debt filed for bankruptcy in June, according to Haynes and Boone’s Oil Patch Bankruptcy Monitor:

  • Warren Resources ($486 million in total debt, including $180 million unsecured)
  • Tauren Exploration ($23 million in debt)
  • Maxus Energy ($295 million in debt, all unsecured)
  • Triangle USA Petroleum ($692 million in total debt, including $382 million unsecured).

This brought E&P bankruptcies tracked by Haynes and Boone in the US and Canada to 43 filings in the first half of 2016, involving $40 billion in debt – of which $30 billion is unsecured.

In these bankruptcies, unsecured creditors end up pecking at the crumbs that fall off the table, if that, and even secured creditors can take a big haircut depending on how much the value of their collateral – mostly oil and gas in the ground and yet to be recovered – has plummeted. In some fields, the current price is too low to drill new wells profitably to recover the oil and gas. In these cases, the collateral value can get painfully close to zero.

How much worse is 2016 than 2015? During the entire year 2015, 42 E&P companies filed for bankruptcy, with a total debt of $17.2 billion. So, over the first six months in 2016, the debt in E&P bankruptcies exceeds the total for the entire year 2015 by 155%!

Both 2015 and 2016 combined – a measure of the Great American Oil Bust to-date – generated 85 E&P bankruptcy filings involving $61.2 billion in debt, of which $44 billion is unsecured.

And the rest of 2016? Haynes and Boone put it this way in its E&P report: “Despite the modest recovery in energy prices, all indications suggest many more producer bankruptcy filings will occur during 2016.”

The bankruptcies of oilfield services companies are tracked separately. Through May, the last report available, there were 23 filings with $6.4 billion in debt. This brings the total from January 2015 through May 2016 to 72 bankruptcies among oilfield services companies, involving $11.7 billion in debt.

Between E&P and Oilfield Services companies, the Great American Oil Bust has now generated a combined 157 bankruptcies involving $73 billion in debt, much of it unsecured and by now mostly evaporated.

And yet, this still doesn’t include the many bankruptcies of businesses that work with and supply the oil patch, from companies that house oilfield workers to small manufacturing shops. They’re part of the thousands of US companies that have filed for bankruptcy this year, after loading up on debt over the years while the economy has refused to hit that promised “escape velocity.” Read…  The Big Unravel: US Commercial Bankruptcies Skyrocket

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  30 comments for “Great American Oil Bust Rages on; Defaults, Bankruptcies Soar

  1. Curious Cat
    July 12, 2016 at 7:41 pm

    Does anyone have any idea the portion of all junk bonds represented by the US energy industries?

    • tom
      July 14, 2016 at 9:08 pm

      In paragraph three it says “Energy companies accounted for 56% of those defaults”.

  2. July 12, 2016 at 8:00 pm

    House of cards collapse in slow motion. It was only a mater of time.

    • July 12, 2016 at 8:19 pm

      Once the actual collapse happens, George, it will go all at once. What we are seeing is just the cracks widening.

  3. illumined
    July 12, 2016 at 9:39 pm

    US commercial bankruptcies led by oil and gas skyrocket, yet the indexes are now at an all time high. 2007 all over again?

  4. Merlin
    July 12, 2016 at 9:48 pm

    oil and gas BK, real estate bubble burst, banks on the rocks……sounds soooo 1980s……..

  5. Merlin
    July 12, 2016 at 9:51 pm
  6. Paulo
    July 12, 2016 at 10:29 pm

    It seems to be speeding up. Debt frenzy continues and helicopter announcements keeps the fear at bay for many. But there is just no reason for growth right now.

    This seems to be the big stock surge similar to 2007-8…the final lurch before the oh sh#t moment. Hang on, imho.

    • Álvaro
      July 13, 2016 at 3:35 am

      I have no doubts about the shit hitting the fan at some point, but I’m getting so bored right now. I don’t know how far this charade can go.

      • Stavros H
        July 13, 2016 at 12:02 pm

        The History of Capitalism shows us that industrial cycles (or business cycles) tend to span anywhere from 7 to 10 years. The only exception was the “Clinton Cycle” of the 90s which lasted for 11 years (the Nasdaq, “New Economy” boom & bust of the 90s)

        We are now fast approaching the 8th year mark since the last Panic struck. This may very well go on for 2 more years. But it will probably take less than that. There is also the counter-argument that because this recovery was so extremely weak, the expansion will last for longer than usual, but I don’t think that to be the case.

  7. Agnes
    July 13, 2016 at 1:50 am

    The University of Wyoming is offering a buy out this year costing 3 million dollars to save money in 2017. People have to be 61 or older, have worked 11 years and 5?7? consecutively. The positions will be stockpiled(Hiring freeze). The VA hospital in Cheyenne is being treated as a political football to try and force Wyoming to expand Medicaid. Two big coal companies did pay their taxes after declaring bankruptcy this year, but I have low expectations they will next year. Wyoming has a two year budget process. The new UW president has declared financial force majeure–this means she can fire tenured professors. OTOH, rents are reasonable and it is a 1.5hour trip to legally toke(n.b.the active chemical in mj works the same way on nerves that carbon monoxide does in the lungs). Strangely enough commuters are going both ways between Laramie and Colorado.

  8. night-train
    July 13, 2016 at 2:33 am

    A couple of oil & gas terms: ” Junk shot” – a term for a technique used to kill a wild well. ” Junk basket” – a down hole tool designed to recover debris too large to be carried out of well bores through mud circulation.

    And now we have to add another important oil & gas term: ” Junk bond”. It seems that many of the E & P companies have junk baskets filled with junk bonds, that may only be worthy of the junk yard. Sorry to put this junk in the comments.

  9. d
    July 13, 2016 at 3:06 am

    Wo is picking up the licenses ( Drill wrights) for penny’s? Somebody will be

    • night-train
      July 14, 2016 at 4:13 am

      Drilling rights, better known as mineral leases, or O&G leases, fall into two types: those held by production (HBP), as in held by a producing or, in some cases a shut-in well, if that well is believed to be capable of being productive. As always, some restrictions apply. The other are undeveloped leases on which the clock is ticking. Their term being usually between 1 and 10 years.

      Someone will buy these leases and production if the price is right. In the shale plays, the O&G companies paid way, way too much for the leases. So I am interested in what prices will be paid. But even at pennies on the dollar for leases, the majority of the shale plays are still uneconomical to drill at anything lower than $70 oil. And to actually get a reasonable ROI, we are looking at $100+. Ladies and gentlemen, place your bets.

      • July 14, 2016 at 3:42 pm

        RE: … Ladies and gentlemen, place your bets.
        Indeed, and in the casino where all cards are marked, all dice are loaded, and all wheels are rigged.

        How much more blatant evidence of market manipulation must accumulate before meaningful reforms are implemented?

        Another poster referenced the violent French and Russian revolts. These are prime examples of the truth of the observation “when necessary incremental change is prevented/repressed, violent disruption and correction becomes inevitable.”

  10. Yoshua
    July 13, 2016 at 4:57 am

    Saudi Arabia’s latest project was the Manifa oil field, off shore in shallow water with 27 man made islands, producing heavy oil. The project is estimated to have cost $10 billion and is uneconomic with today’s oil prices.

    If Manifa was the best of Saudi Arabia’s reserves in line to be developed, then the next in line is even worse.

    The giant Ghawar oil field has been depleted to the degree now that Saudi Arabia has officially declared that they has started a program of Enhanced Oil Recovery at the field. EOR is a much more expensive form of oil extraction. Saudi Arabia can no longer produce oil at $50 p/b.

    Saudi Arabia went $100 billion minus last year.

    The oil price will never recover again since oil can no longer generate enough economic value to pay for its production. The oil industry consumes today 60 percent of each barrel of oil produced.

    • Nicko
      July 13, 2016 at 5:03 am

      And a new study has declared the US has the largest energy reserves in the world

      Three cheers for American innovation, but perhaps it’s possible to have too much of a good thing?

      • Yoshua
        July 13, 2016 at 5:28 am

        Saudi Arabia has been estimated to have 530 billion barrels of Original Oil in Place (OOIP). They have produced 140 billion barrels today, or some 25 percent of the OOIP.

        The average Recovery Rate in the world of the OOIP is 30 percent. That means that some 70 percent of the OOIP is still in the ground. Through Enhanced Oil Recovery they can extract an additional 30 percent of the OOIP.

        The oil left in the ground is of lower quality and much more expensive to extract.

        The oil producers will extract that oil until they go bankrupt.

        • Nicko
          July 13, 2016 at 9:43 am

          I don’t think anyone believes Saudi oil numbers, not that they’d confirm or deny.

        • The Cynic
          July 13, 2016 at 12:31 pm

          …… or until the consumers do, paying for the higher prices that will flow on as a result

      • night-train
        July 14, 2016 at 4:28 am

        Another thing unproven is how, or if, secondary and tertiary recovery will work on shale plays. And since the majority of US reserves are in the unconventional shale plays, the large reserve numbers in these plays may be irrelevant. You don’t have to be a genius to find oil in the middle of an oil field. But if you can’t get the oil out of the ground, you have just spent money on which you won’t see a return.

  11. Uncle Frank
    July 13, 2016 at 9:35 am

    “A beer wholesaler that spoke off the record said the population has decreased by approximately 30,000 people in the Midland-San Angelo axis since the oil bust. It’s his estimate based upon beer sales volume.”

    • Night-train
      July 14, 2016 at 4:31 am

      Probably a good way to make the estimate. Unless, I was there, which might skew the results. :)

  12. Ptb
    July 13, 2016 at 10:43 am

    Gary shilling is calling for $10 to $20 oil.

  13. July 13, 2016 at 10:57 am

    If Jeff is paying you per person who signs up you might want to change that message on the other page to make it more appealing to sign up – which I won’t be.

    If he’s paid you a lump sum – well more fool him – but good on you.

  14. Intosh
    July 13, 2016 at 11:50 am

    Here’s something I find funny about mainstream media coverage of markets: Google for “Oil Prices Slump as US Crude and Product Supplies Hit Record”. When you click on the result, it will lead you to an WSJ article with title “Oil Rises on Supply Forecast, Inventory Expectations”. Goes to show mainstream media covering this subject is just meaningless BS where they could change a story 180 degrees within the same day.

    • Captain KurtZ
      July 13, 2016 at 1:08 pm

      Baffle’em with bullshit.

      The media cover up works even better when they don’t just tow the line, but shake it all over the place, whipsaw it back and forth,…. confusion is a much better set up than a party line. Moving target theory.

      People become sheeple cuz they give up aiming…. They sound like a genius one minute, then look like fools the next moment.

      Wondering if everything is now psy-ops.

  15. Chicken
    July 13, 2016 at 1:57 pm

    Yes media sells advertising, they don’t actually inform or educate. Consider who owns media, follow the money.

    Oil – So let’s see, seems I’ve been paying some mighty high prices at the pump for decades now, until just recently of course….. Sheesh, even diesel is about the same price as gasoline now.

    Energy ain’t free folks, that’s just the way it is. Sorry to disappoint! Looking beyond the end of my nose (where media has conveniently and habitually parked their billboards) into the future – So the price of oil goes apes**t again immediately after current producers default and the big boys have swooped in to gorge on assets at a fraction of their value.

    Is that about right?

    I hear there’s some kind of game changing tech whirlwind coming, still no idea what it might entail but smells like yet another advert.

  16. July 13, 2016 at 3:48 pm

    The entire petroleum industry is insolvent.

    The drillers can still to some degree receive support from their bankers but not their customers. Elites in the West can gain funds but certainly not in the rest of the world and flyover country = here, the customers are broke.

    Prices have ‘surged’ to $50/barrel earlier this year, they surged to $65 last year, $115/barrel in 2014, $128 in 2012 … surged big time to $147 per barrel in 2008. In every event the credit system broke down and prices fell. The same thing just happened/is happening. The question becomes: to what incredible price level will the next surge take oil? $25/barrel? @ $15 there is no more industry at all.

    What supports the wellhead price is ability of (deluded) end users to borrow … and deluded banks to lend. There is nothing the ordinary consumer can do with the oil to pay for it. He can waste and enjoy the ride. Without organic, top-line return to the actual users there is the the absolute need to borrow. Absent end-user loans there is the certainty of loss to the extraction firms as well as to their lenders which both require the flow of borrowed funds from end users to save themselves from ruin.

    Of course, not a word of this from the large- and growing cadre of professional economists who natter on endlessly about angels and pins: the ceaseless fiddling with interest rates and the money supply … none of which is relevant to anything. Monetary ‘tactics’ are failed attempts to ‘liquefy’ the end users; failure because these users spend their borrowings as soon as they get them, which means follow-on rounds of loans = more stress on credit system.

    What is needed … is to conserve, to make do with less, to become men and to put away childish things (1 Corinthians).

    One way or the other it’s going to happen anyway and there is nothing the economists, politicians, drillers, bankers or anyone else can do about it, either.

    • Mustafa Hamsho
      July 23, 2016 at 3:57 pm

      +1 to you, sir. You nailed this thing to the wall. The only thing remaining really is to discover how the mainstream media will blame it on the GOP.

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