Shale debt defaults set to reach scale of telecoms crash, Fitch says

HOUSTON – The U.S. oil industry is facing a financial crisis on the scale of the telecom crash of 2001, with domestic drillers expected to default on more than one-third of the junk-rated debt they ran up in the last oil boom.

Fitch Ratings says the portion of U.S. explorers that have failed to pay off their riskiest corporate debt has already reached a record 27 percent, and that default rate could rise to as much as 35 percent this year as more companies file for bankruptcy or skip interest payments.

It means the independent creditors who took a chance on the fledgling shale industry at the center of the nation’s biggest oil and gas boom in four decades could lose $40 billion of the $110 billion that drillers borrowed when oil prices were still hovering around $100 a barrel.

“It’s a significant chunk of the market,” said Eric Rosenthal, senior director of U.S. leveraged finance at credit ratings agency Fitch Ratings. “And the defaults are still coming. It’s a matter of when rather than whether they’ll default.”

A handful of midsized U.S. oil companies including Linn Energy, SandRidge Energy, Breitburn Energy and Penn Virginia have filed for bankruptcy in recent weeks, with the number of North American oil industry bankruptcies topping 70, according to Dallas law firm Haynes & Boone.

Last year, U.S. drillers defaulted on $13.6 billion of the high-yield debt that creditors had gladly provided years earlier while low interest rates made it harder to profit on normal investments.

Earlier this week, Louisiana-based Stone Energy said it is trying to restructure its finances, and that effort may include filing for bankruptcy. The company, which drills in the Gulf of Mexico, also skipped a $29 million interest payment due this week, entering a 30-day grace period.

Many of the companies headed for bankruptcy when crude prices tumbled below $40 a barrel aren’t going to be saved by $50 oil, Rosenthal said. Several of them need crude prices to rise above $65 a barrel to break even on expensive shale wells that can cost $8 million apiece.

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