Energy’s Distress May Ease Because So Many Already Went Bust
(Bloomberg) -- Better days may be ahead for energy companies after a busy year of bankruptcies, with the coronavirus pandemic culling the weakest borrowers and investors pricing in a sharp economic recovery when vaccines become widely available.
About $144 billion of energy bonds were trading at distressed levels in the middle of March, when the pandemic sent oil demand plunging, but that number receded to $37 billion by the end of November. That’s because some oil and gas companies have filed for bankruptcy while others have seen their fortunes rebound, according to Bloomberg Intelligence.
Nabors Industries Ltd., Transocean Ltd., and Callon Petroleum Co. are among the relatively few energy companies with debt still trading at distressed levels that have not filed for bankruptcy, and may never. The average yield on the Bloomberg Barclays High Yield Energy Index has dropped to 6.2% -- by definition, no longer high yield -- since spiking to 24% in March.
Representatives for Nabors, Transocean and Callon didn’t respond to a request for comment.
Industry watchers say this year’s energy distress boom is unlikely to be repeated in 2021. In part, the wave of restructurings left fewer maturities to trip up borrowers. Support may also come from buoyant credit markets and an expectation that economic activity will pick up in the second half as more people get vaccinated. That said, it won’t be completely smooth sailing.
“The pace next year is not going to be the same pace as 2020, but there are still going to be Chapter 11s,” said Becky Roof, a Houston-based adviser at AlixPartners.
It’s been the second-busiest year for energy restructuring since 2016 -- the height of the fallout from $100 oil -- with 107 producers, oilfield servicers and midstream companies filing for bankruptcy, according to data from law firm Haynes & Boone.
The commodity price has stabilized around $45 a barrel, after briefly dipping to negative prices in the spring, and natural gas prices have rebounded. Energy companies have been buoyed by expectations that coronavirus vaccines will reach most of the population by summer, bringing a return in demand for fuel.
But current prices still aren’t enough for most producers to survive long term, according to Spencer Cutter, an analyst at Bloomberg Intelligence. He sees bankruptcies slowing next year, but mostly as a pause before maturities start to tick up in 2022 and 2023, which could put some companies back into trouble.
“The weakest have been culled from the herd,” Cutter said. “Most of the remaining companies may not be making much or any money with oil at $45 and natural gas below $2.75, but they have the liquidity to ride things out for awhile.”
The fossil-fuel industry has to deal with being out of favor among many investors, who are shifting to more climate-friendly companies, and a new U.S. government that could push tougher regulations, according to Roof at AlixPartners.
“There’s so much liquidity that used to be available to this market, and it’s gone,” she said. “Any company that is planning on a traditional refinancing, there are just much fewer sources available now because it’s an industry that’s out of favor.”
Matthew Warren, a restructuring partner at law firm King & Spalding, foresees more consolidation in the sector, with some companies using bankruptcy to complete transactions.
Many borrowers renegotiated terms of their debt or resorted to bonds that pay interest in the form of more bonds instead of cash to make it through this year, Warren said. But with oil prices still too low to sustain them, the clock may finally run out in 2021.
“I don’t think by any stretch a lot of energy companies are out of the woods, despite the stabilization in energy prices,” he said.
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