By Peter Taberner, a reporter for FX Empire, and the International Finance Magazine, where he writes on energy markets, specializing in nuclear power and the renewable energy sectors, regulations, new technologies, and financial considerations in the energy market. Originally published at OilPrice
Creditors from bankrupt oil and gas companies are suffering in the current climate, as loan recovery rates have plummeted while insolvencies have increased, which may even be on a par with the collapse of the telecoms industry in the early 2000s, according to Moody’s Investor Service.
The branch of the ratings agency which provides credit assessments, research, and risk analysis in 130 countries, has announced that in 2015 a glut of bankruptcies and defaults in the oil and gas sectors, have been encouraged by the low commodity price conditions.
Throughout 2015, Moody’s counted that there were 17 oil and gas bankruptcies, with 15 of them coming from the exploration and production sector (E&P).
The number of E&P bankruptcies has accelerated this year, with analysts anticipating that the volume of failed E&P companies will reach twice the number for last year.
In comparison, when the telecoms industry boom had turned into bust, Moody’s Database recorded 43 company bankruptcies, during a three-year period between 2001 and 2003.
David Keisman, Senior Vice President at Moody’s, suggested that the end result of the current unfolding patterns, could turn out to be a segment wide bust of historic figures.
The knock on effect on creditors has been huge, as the 15 E&P companies who filed for bankruptcy, held debts that totalled at least $100 billion.
Recovery rates for E&P bankruptcy in 2015 averaged only 21 percent, a significantly low ratio of arrears being claimed, far lower than the historical average of 58.6 percent.
Overall, Moody’s study revealed that the average recovery rate between 1987 and 2015 was 50.8 percent for corporate bankruptcy protection levels in that time.
Additionally, at the debt instruments level, in total 81 percent of reserve based loans were recovered in 2015, 17 percent lower than what was retrieved from E&P bankruptcies during 1987 and 2014.
Other debt instruments suffered more, high yield bonds recovered a derisory 6 percent, compared to a recorded rate in the low 30 percent range in previous E&P bankruptcies.
Oil prices have hardly been a boon to those companies which have been in trouble, with Brent Crude prices beginning to fall away midway through 2014, precipitating to a nadir for U.S. crude of just $30 per barrel in January.
According to Deloitte’s report released earlier in the year “The Crude Downturn for E&Ps: One Situation, Diverse Responses.”, E&P companies have made huge sacrifices, by slashing $130 billion of their capex spending, alongside other measures such as asset sales, equity issuance, and lower shareholder distribution.
The U.S. Federal bank regulator, the Office of the Controller of the Currency, is also keeping a watchful eye on the banks’ oil and gas portfolios, after seeing a rise in undeveloped reserves, which banks have used as collateral for loans.
Overall, the Deloitte report revealed that the debt/EBITDA ratio of a large section of U.S. oil and gas companies has surpassed the asset impairments threshold of over $135 billion by U.S. oil and gas companies.
Despite the adverse conditions of high leverage and weak operational performance, the thirst for risk has not dissipated Deloitte believes, with an estimated 40 percent of deals not being concluded for non-producing fields, which have high capex commitments, with no cash flow generation.
In addition, 64 percent of corporate deals by value, had a debt component of more than 20 percent, even though the banking industry is looking to squeeze the usual credit conditions.
Stephen Kennedy, the head of energy banking for Amegy Bank, reflected: “I am not surprised in a low price environment that we are seeing a high volume of bankruptcies. This is the worst downturn since the mid-eighties, there has been a dramatic price fall, and companies have not had the sufficient capital to withstand the situation.”
“They have to survive this downturn, they have to have liquidity needs to cut unnecessary capital expenditures and overheads. During this year, oil companies replaced only two thirds of their produced reserves, there is usually a 7 percent annual depletion of oil reserves. In 2014 it was different, as in North America there was an increase of 1.8 million barrels per day, and the rest of the world replaced all of their product reserves.” Kennedy added.
He also argued that it’s going to take more than a workout of debt repayment out of cash flow, conversion of debt will be needed where the public bond holders exchange their debt for company stock.
That relieves the company of the interest rate burden of that debt, although there is a risk that current stockholders may end up with nothing.
Kennedy opined: “Debt structure was far simpler and less complex in the mid-eighties compared to now, as then it was equity and bank debt, now they may have equity and may have subordinated debt, institutional investors, secondary debt to financial players, and then senior debt which is all banks, unsecured bonds are two thirds of the debt structure of the company.”
“It ends up being the lever of whether the company survives or not, the banks are suffering losses, and creditors, mostly bond holders are a large burden on the company, which is why bankruptcies are filed.”
Kennedy also agrees with the conclusion of the report, that there are more bankruptcies to come, which could leave creditors to be more out of pocket.
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Throw in coal industry headaches too. A large number of investments backed by US and China banks in South American, Australia, and Indonesia are all suffering under huge infrastructure costs that that only started paying (or have not even started paying); and these sites have extensive manpower requirements for both extraction and maintenance that make their continued operation a higher percent of costs than most gas/oil well sites.
Just had a dinner with senior staff of China’s biggest nuclear fleet operator. They currently shut down 8 reactor trains due to lack of demand, their fuel still burning, abet at a slower rate, and of course 7 of these are new units which also have to make bank payments.
Lack of demand? I call it overcapacity. That had been brimming for years.
http://www.ejinsight.com/20160927-chinas-renewable-energy-glut/
The article is correct on the effect/problem, if not the causation which is the opportunities for corruption in renewable power in China are in the building, not in the operating.
So far as I know the biggest problem in Chinese renewables is lack of grid capacity – quite simply, they don’t have the power lines to export the wind/solar to where its needed (or to be precise, where it would get a decent price). But there is a well known problem with renewables where they tend to cannibalise their own profits through overcapacity. Its not, however, a problem in most areas where there is a better match to grid and storage capacity.
What you say above about nuclear is very interesting though – nuclear power has a similar problem to renewables in that it struggles to provide on-demand power and the costs are mostly up front capital costs. Hence if you overbuild, you end up destroying not just your market, but everyone elses. I think there has long been a suspicion that China is not using as much electricity as claimed, once market watchers started using power demand as a proxy to test if GNP growth figures are correct.
Its been a long time coming – Gordon Chang predicted this in the 1990’s, but he was way too pessimistic – that essentially the Chinese policy of building things and waiting for demand to catch up would lead inevitably to chronic deflation – but it may well have finally happened. But in a smaller way cheap money policies have caused the same problems all over the world. Its clear we have too much capacity in the wrong places in most energy sectors, not to mention in shipping, car and ship production, etc. etc.
http://www.ejinsight.com/20160929-whats-driving-chinas-e-vehicle-subsidy-fraud/
Build it and the grid might come is partially true, but most solar plants in the sane world don’t directly connect to 400+ kV main grid transmission. Mostly it’s simply there is no incentive for the 200kV and lower local grids/distribution to take the very dirty and unstable power from these plants, and there is no money to fund the building of capacitance banks necessary, and the two national grid companies have kept a monopoly for pumped storage facilities (because they are so capital intensive, and thus lucrative sources of corruption).
The follow article is a glimpse of this sort of re-distribution from the government to cadres pockets by dressing up a public good which needs subsidizing.
http://www.ejinsight.com/20160929-whats-driving-chinas-e-vehicle-subsidy-fraud/
I attributed all this to the Saud family ECON War prompted by Israelis dominance of US Foreign policy while Petrodollar Deal looks near death, for Yemen was militarily a surprise to Kerry & State Department.
Monopoly of Saudi Arabia in oil as we enter the death throes of the 100 Years Oil War is desirable to them for as long as the oil will last as # One source of Energy.
Financial Engineers are encouraged to provide a stable price because ECON War is causing reasons for Western & Venezuelan suffering & destabilization faster than any solution possible.
P.S. Saudis threat to wreck US over Court action aimed to link family to 9/11 is also part of ECON War motivation. US must speed to Solar as it cannot get Petroleum on its territory for as long at parity production price even if aquifers in fields thrown to the winds which is reason climate models are inaccurate and tourists sail the Arctic.
Please explain: “US must speed to Solar as it cannot get Petroleum on its territory for as long at parity production price even if aquifers in fields thrown to the winds which is reason climate models are inaccurate and tourists sail the Arctic.”
Sorry — I don’t understand what you are saying and I am curious.
The news here is that the E&P credit spigot is off. What I perceive as a seldom discussed cause is corporate governance and C-suite pay schemes. Pay attention. The majors actually have been borrowing money to pay dividends and buy-back stock – both efforts to enrich owners and execs while risking the future of the business – and tying up credit worthiness. What should have happened is the majors holding on to profits, then gobbling up these smaller producers, either prior to or in bankruptcy so that the value of those liquidated assets would be a bit higher. Viewed this way, the problem is looting reducing the resiliency of the industry, risking workers’ futures and the long-term health of the obviously lucrative business. Individual greed leads to collective misery.
Yeah, but the Reits credit spigot is turned right back on. Sorry, but that has a larger impact on growth than that small scale E&P.
Lets face it, “bankruptcies” are the end of the rainbow. Oil/Gas bankruptcies will plunge in 2017 and will be old news.
And this time the REITs won’t have to worry about covering up their noncompliance with the trust corpus requirements of the tax code since they know the IRS won’t enforce any of the penalties anyway.
Ripple affects are being felt here in Michigan. Comerica Bank over the past month has gone through a staff reduction that hit most areas of the bank, at least here in MI. It is likely not due to loan issues here in the state as the bank has been very conservative but insiders I’ve spoken with say it has to do with loan exposure in their energy portfolio. This happened to MI back in 2006-2008 where MI got whacked along with other parts of the bank due to their lending problems in CA and AZ. MI loans were less of an issue as the bank had pretty much red-lined the state since the early 2000’s so Comerica did not get as caught up in the subsequent problems here.
The reduction in banking staff is happening here in Texas also with comparable sized banks