Oil industry bankruptcy approaches magnitude of US telecom bust
This week, a total of 59 oil and gas companies are now bankrupt after Midstates Petroleum MPOY.PK and Ultra Petroleum UPL.NL filed for creditor protection. The disaster of the falling crude prices is turning into one of the biggest avalanches in the history of corporate America.
According to Reuters data, the law firm Haynes & Boone and bankruptcydata.com, the number of US energy bankruptcies is closing in on the staggering 68 filings seen during the depths of the telecom bust of 2002 and 2003. Fifteen oil and gas companies filed for bankruptcy in the first quarter.Charles Gibbs, a restructuring partner at Akin Gump in Texas, said the U.S. oil industry is not even halfway through its wave of bankruptcies.”I think we’ll see more filings in the second quarter than in the first quarter,” he said.
Some oil producers are still hoping that the price of crude will stabilize at a higher level. In February, oil slumped as low as US$27 a barrel from peaks above US$100 a barrel nearly two years ago. US crude has recovered somewhat, and on Tuesday was trading a little below US$44 a barrel.
Banks had been willing to offer leeway to borrowers in the shale sector before but recently, some lenders have tightened their purse strings.
Oil price volatility makes valuations difficult so the widely predicted mergers in the shale sector have not yet materialized. Buyers hesitate to take on debt loads until their target companies exit bankruptcy.
The telecom and energy boom-and-bust cycles have notable parallels. Pioneering technology brought an influx of investment to each industry, a plethora of new, small companies issued high levels of debt, and a subsequent supply glut sapped pricing just as demand fell sharply.
Both crack-ups are still below the housing and financial bust in 2007-2009 in terms of magnitude and economic impact, but the last two years has seen significant losses for energy investors in the stock and bond markets.
According to the Dow Jones US Oil and Gas Index, which tracks about 80 stocks, a 60% slide in oil prices since mid-2014 erased as much as US$1.02 trillion from the valuations of US energy companies. This has already surpassed the US$882.5 billion peak-to-trough loss in market capitalization from the Dow Jones US Telecommunications Sector Index in the early 2000s.
In the debt market, there are also signs that lots of money could be lost this time around, especially in high-yield bonds. During its boom, U.S. oil and gas companies issued twice as much in bonds as telecom companies did in the latter part of the 1990s through the early 2000s.
Between 1998 and 2002, about US$177.1 billion in new bonds were sold in the US telecommunications sector; less than 10% were junk bonds. US oil and gas companies sold about US$350.7 billion in debt between 2010 and 2014, the peak years of the oil-and-gas boom, with junk bonds making up more than 50% of all issuance, according to Thomson Reuters data.
Source: Reuters