Default Rate for Oil and Gas Companies with Lower Credit Ratings Poised to Double

Strategic Insights -

Moody's Investors Service has estimated that the default rate for oil and gas companies with lower credit ratings could more than double in the coming year. According to Moody's, the default rate for oil and gas companies with credit ratings of B2 or lower is expected to increase from 2.7 percent to 7.4 percent by March. This warning comes as oil prices have started to recover, nearing the $65 per barrel mark for the global benchmark Brent, but still leaving weaker oil and gas issuers vulnerable to default.

Key Takeaways:

  • Moody's estimates the default rate for oil and gas companies with lower credit ratings (B2 or lower) will increase from 2.7 percent to 7.4 percent by March.
  • Quicksilver Resources, a Texas company focused on North American shale, has filed for Chapter 11 bankruptcy this year.
  • British energy company BG Group was acquired by Royal Dutch Shell due to low oil prices.
  • As of May 1, 15 percent of the companies with credit ratings of B3 or lower were from the oil and gas sector, the largest share for any U.S. corporate sector.
  • More than 70 percent of U.S. exploration and production companies with ratings in the B1 range maintained or improved since June 2014.
  • The oil and gas industry is characterized by boom and bust cycles, with many experienced management teams facing low oil prices.
  • Low oil prices will continue to pressure the industry-at-large and credit metrics of companies with lower credit ratings.

Statistics:

  • Default rate for oil and gas companies with lower credit ratings (B2 or lower) expected to increase from 2.7 percent to 7.4 percent by March.
  • Recovery in energy prices increases risk of default for weaker oil and gas issuers.
  • As of May 1: 15 percent of U.S. companies with credit ratings of B3 or lower were from the oil and gas sector.
  • 70 percent of U.S. exploration and production companies with ratings in the B1 range maintained or improved since June 2014.
  • Global benchmark Brent oil price: near $65 per barrel.

Sources:

  • Moody's Investors Service
  • New York, May 20 (UPI)