Fitch says higher oil prices have not eliminated U.S. energy defaults

By Caroline Salls

Pittsburgh, June 19 – Fitch Ratings reported Tuesday that defaults are still occurring in the U.S. energy sector, notably the exploration and production (E&P) subsector, despite higher oil prices.

Fitch said distress peaked in August 2016 with a 32.1% default rate for E&P companies and in January 2017 with a 19.7% default rate for energy overall, but lingering dislocations from shale and the lagging cleanup of capital structures is resulting in continued distressed debt exchanges and returns to Chapter 11 bankruptcy for speculative-grade E&P firms.

The agency said higher oil prices are expected to provide significant relief for high-yield E&P companies, as higher realized prices improve cash flow and support liquidity and generally ease refinancing conditions.

The E&P high-yield bond trailing-12-month default rate ended May slightly elevated at 5.8%, versus 2.7% for the total U.S. high-yield market. However, Fitch said the May trailing-12-month institutional leveraged loan energy default rate was 19.4%, mainly resulting from Fieldwood Energy LLC, which comprised 40% of energy loan defaults over the past year, versus 2.5% for the total market. Fieldwood was the largest energy loan default on record.

Fitch said many of the defaults reflect the lagged impact of lower oil prices and the lingering effect shale dislocations had on company business models. This includes bankruptcies or distressed debt exchanges by Philadelphia Energy Solutions, LLC, Proserv Global Inc. and Denbury Resources Inc.

Additionally, Fitch said 45% of 157 issuers that completed distressed exchanges since 2008 experienced a subsequent default, partially because of the lagged cleanup of capital structures. Roughly one-third of these repeat offenders were E&P firms, including Rex Energy Corp. in May, along with Denbury Resources, EXCO Resources, Inc., SAExploration Holdings, Inc. and Legacy Resources in January.

Fitch said it forecasts few additional defaults for the rest of 2018, with the high-yield bond energy sector default rate expected to decline to 2% for the year, in line with that of the total high-yield universe, and the leveraged loan energy sector default rate falling to 11%.

The agency said its longer-term outlook for the E&P subsector is stable as a result of improving shale economics.

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