Moody’s: More oil driller defaults coming as banks restrict lending

HOUSTON — Moody’s Investors Service says it expects more U.S. oil companies to default on risky corporate debt over the next few months as banks tighten lending standards and as contracts that locked-in higher crude prices for future production start to expire.

Oil producers in the second quarter accounted for seven of the nation’s 15 high-yield debt defaults, a three-year quarterly high. The credit ratings agency said its oil and gas liquidity stress index — a measure of corporate financial weakness in that sector — rose to 10.4 percent in June, up from 3.8 percent a year ago.

“We expect that the energy sector will continue to be a primary driver of defaults over the next year,” John Puchalla, a senior vice president at Moody’s, said in a written statement. Still, Moody’s stress index is well below the index’s peak of 26 percent during the 2009 financial crisis.

U.S. crude prices have fallen from around $60 a barrel last month to around $45 a barrel on Monday. Banks are set to reassess how much they should lend to oil companies in the fall, which could cut into oil companies’ borrowing bases. Banks are also starting to tighten lending standards, just as past hedges – contracts for future production – start to roll off and expose oil companies to the full brunt of current crude prices, said David Denechaud, an attorney at Sidley Austin in Houston.

“That’s going to drain liquidity out of the market,” Denechaud said. That doesn’t necessarily mean the producers will have to resort to Chapter 11 bankruptcy protection. Private investors have billions of dollars stashed away to purchase distressed oil companies, and more firms will probably sell themselves starting in the fall, he said. “I am not anticipating seeing a fire-sale atmosphere.”

Moody’s said five of the seven oil companies that it considers to have been in default in the April-June period had distressed exchanges, in which companies offer creditors new or restructured debt or other securities in exchange for older debt. Moody’s defines a distressed exchange as an event of default.

Moody’s said the five companies that had distressed exchanges were Houston-based Halcon Resources and Midstates Petroleum, as well as American Energy Partners’ Woodford unit in Oklahoma, Denver-based Venoco and New York-based Warren Resources. Those five companies were not necessarily in default with their lenders because of the distressed exchanges.

Houston-based Sabine Oil & Gas in June became the sixth public American oil producer to file for Chapter 11 bankruptcy protection this year.

Moody’s believes its overall U.S. liquidity stress index will rise from 2 percent in the second quarter to 3.2 percent in February, driven by financial pain in the oil industry. The firm expects the index to decline to 2.9 percent by June 2016.

Note: This story has been updated to clarify the status of the energy companies that Moody’s considered to be in default.