US, WASHINGTON (ORDO NEWS) — Last year, the energy industry was shocked by a record number of bankruptcies that even large oil companies did not spare. According to Hayes and Boone’s, a total of 50 energy companies filed for bankruptcy last year, of which 33 were oil and gas producers and 15 were oil service companies.
Meanwhile, Chevron, Schlumberger and Royal Dutch Shell announced a drop in asset value by several billion dollars, noting an unfavorable macroeconomic forecast. And this situation will continue for a long time, because there are fears that the debt burdened oil service companies will be hit.
North American oilfield services and drilling companies bear a $ 32 billion debt burden, which will have to be paid until 2024. A frightening prospect, given that oil prices have fallen to 20-year lows.
The prospects are especially bleak for companies in dire need of capital injections and companies with weak credit ratings, as drilling is shrinking amid falling oil prices, rising COVID-19 and the price war in Saudi Arabia and Russia, which threatens to flood global markets high volume of oil production.
The poor condition of oilfield services companies is clearly reflected in the VanEck Vectors Oil Services ETF, which has fallen 72% since the beginning of the year, significantly lower than the 30% drop in the S&P 500.
Oil and drilling companies have some of the highest risks,
companies with a junk rating account for 65% of the $ 32 billion debt. Of these companies, Transocean debt is $ 4.3 billion, Valaris debt is $ 1.8 billion, Nabors Industries is $ 1.4 billion, and Superior Energy Services is $ 1.3 billion, due over the next two years according to Moody’s.
According to Moody’s senior analyst Shridhar Kohn, “the rapid spread of coronavirus, the worsening global economic outlook, falling oil prices and lower asset prices are creating a serious credit shock worldwide, across many sectors, regions and markets.”
The largest investment companies in the sector, Schlumberger, Halliburton, Baker Hughes and National Oilwell Varco, are more likely to weather the storm. They offer other services that offset the decline in drilling.
In general, investors are not yet striving for the energy sector, the bonds of energy companies of which are well represented on the US market of $ 1.5 trillion “junk” bonds. Last week, the market expected defaults on energy bonds at 14.08%, double the average default rate of 7.66%.
And against the backdrop of defaults, the ghost of an even greater number of bankruptcies looms on the horizon.
When oil prices began to fall, North American producers filed for bankruptcy for a total of $ 121.7 billion since 2016. According to Moody’s, the nominal debt of the US oil and gas industry is $ 86 billion over the next 4 years, one of the highest rates in any sector. Amid falling oil prices, these companies are particularly difficult to meet debt obligations.
Kramer predicts a new wave of bankruptcies that could hit the industry. According to the scientist’s forecast, 9-10 oil and gas companies out of 35 enterprises will fail at low energy prices.
Unfortunately, the current situation seems unreliable: neither Saudi Arabia nor Russia are ready to give in first in the ongoing price war.
Given that the Saudis control the market and flood it with oil, an oversupply of oil can reach a staggering 1 billion barrels in a few months. Oil for $ 10 per barrel suddenly becomes a completely possible outcome of events. Although the US government plans to purchase a total of 77 million barrels of oil for strategic reserves, this is only possible with a limit of 2 million barrels per day, resulting in a huge excess of almost 20 million barrels per day, given that the coronavirus continues crush global demand.
However, forecasts for negative oil prices are exaggerated. Usually, purchases become possible whenever stocks are spent as badly as they are now. But amid low demand, a pandemic and a price war, it’s foolish to try to bottom out on this energy market.
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