Oil and gas companies are defaulting at an outstanding rate due to low oil prices.
Long gone are the days of the energy boom fueled by a wave of credit from U.S. banks. Oil that was hovering around $100 a barrel is now slightly above $40 a barrel. Companies are seeing their revenues decline and remain burdened with debt. Banks such as Wells Fargo, JP Morgan, and Bank of America are now expecting more delinquencies and charge-offs from energy companies this year.
“The energy sector remains the most troubled, accounting for almost a quarter of the 79 defaults so far this year,” said Sharon Ou, Moody’s Credit Policy Research senior credit officer.
The defaults result from years of excessive borrowing. Marc Larsy, chief executive of distressed investing specialist Avenue Capital Group, said these energy companies boosted their borrowings anywhere from $250 billion to $300 billion (compared with the $100 billion at the start of this year).
Some banks are renegotiating their credit lines to oil and gas firms. Others are cutting credit lines to oil and gas companies, about ten firms with a collective total of $1.1 billion according to Reuters, and are requiring more collateral to protect against the surge of defaults.
Energy companies are using any and all tactics to lessen their debt including cutting spending, selling assets, issuing new shares, and hedging their oil production at a certain price.
Not every energy company can escape the grip of debt. Most will have to file for bankruptcy. Analysts forecast the default rate will increase within the year.
Article written by HEI contributor Aliyah Cole.