![Bankruptcy Risks Rise For US Shale](/sites/default/files/styles/hart_news_article_image_640/public/image/2020/02/bankruptcy-risks-rise-us-shale.jpg?itok=EjB9G8wJ)
Weakening oil and gas prices, and bearish market sentiment will hurt U.S. shale producers’ efforts to raise more money. (Source: Hart Energy)
Bankruptcy risks in the U.S. shale sector are rising, with weak oil prices and tightening access to credit worsening the outlook for some producers just as a “staggering” $86 billion in debt maturities start to come due.
Speculative-grade, or subinvestment, debt makes up more than 60% of the total to be repaid between now and 2024, “implying a higher degree of default risk for the industry”, said Moody’s, the rating agency, in a recent report.
Speculative-grade maturities will peak in 2022, dwarfing investment-grade maturities by almost two to one that year, Moody’s said.
But weakening oil and gas prices, and bearish market sentiment—caused by expectations of a global oil-supply overhang in the first half of 2020—will hurt producers’ efforts to raise more money this year, in turn threatening to starve them of capital to invest in production to keep cash flow intact, said analysts.
Companies already rated at subinvestment level and those focused on natural gas are especially exposed and will face investors that have developed a “risk aversion” to the sector, said the Moody’s report.
Natural gas-focused Antero Resources Corp., EQT Corp. and Chesapeake Energy Corp., which between them hold debt of more than $5 billion due to mature between now and 2024, were among 12 companies Moody’s said would face a “particularly challenging” refinancing outlook.
“While these companies have already taken some measures to address maturities, more needs to be done,” said Moody’s.
In January, the average interest rate paid by shale producers for corporate debt rated by Moody’s as B3, or highly speculative, was 400-500 basis points above the average for B3 rated debt across all sectors, said Sajjad Alam, the lead author of the Moody’s report.
Oil prices have fallen more than 15% since early January, reflecting worries about global oversupply that have been exacerbated by the weakness of Chinese demand since the coronavirus outbreak. Meanwhile, front-month U.S. natural gas prices plunged to their lowest February close in 20 years last week, amid unseasonably warm weather.
But U.S. shale producers are also victims of their own longer-term success. Natural gas output in the Lower 48 states of the contiguous U.S. has almost doubled since 2005 and crude oil production has lept almost 160% since 2008.
U.S. natural gas production, which hit a record high in 2019, would rise by another 2% this year, according to a forecast by the Energy Information Administration, a division of the Department of Energy. Crude oil production would increase almost 8%, to 13.2 million barrels a day, it said.
That already represents a slowing of recent annual growth rates, but the looming credit crunch and increased cost of capital for indebted producers, alongside persistent weakness in oil and gas prices, could further damp production growth expectations, said analysts.
Recommended Reading
Safety First, Efficiency Follows: Unconventional Completions Go Automated
2024-07-18 - The unconventional completions sector has seen a tremendous growth in daily stage capacity and operation efficiencies, primarily driven by process and product innovations in the plug and perf space.
Aramco Credits Adaptability, Collaboration for Driving Innovation
2024-05-15 - Aramco’s implementation of different approaches has led to the creation and commercialization of newer products, said Max Deffenbaugh, principal scientist for Aramco, at the 2024 Offshore Technology Conference in Houston.
E-wireline: NexTier Taps Oilfield Grid, Automation for Completions
2024-07-23 - NexTier Completion Solutions is using advanced electric-drive equipment, automation-enabled pump down technology and digital connectivity to optimize wellsite operations during shale completions.
Cracking the Fracking Code: Efficient Approaches to Optimize Wellbores
2024-06-30 - Technology and process innovations improve operational efficiencies even as companies scramble for greener fracking solutions.
ProFrac, IWS Taking the Garbage Out of Oilfield Data Transfer
2024-07-16 - ProFrac and Intelligent Wellhead Systems’ MQTT protocol promises to speed up communications at the frac site, not only by saving costs but laying the foundation for future technological innovations and efficiencies in the field, the companies tell Hart Energy.