Mar 9, 2020 - Energy & Environment

Coronavirus could lead to a wave of defaults for oil companies

A Shell employee in Bangkok filling up someone's gas tank.
A Shell employee in Bangkok filling up someone's gas tank. Photo: Mladen Antonov/AFP via Getty Images

Already struggling with mounting debt and falling market valuations, energy companies are at serious risk for mass bond defaults, especially those rated below investment grade, as oil prices now have fallen by more than 50% from their early January peak.

What's happening: Oil explorers and producers have around $86 billion of debt maturing over the next four years and companies with junk-rated debt were expected to have a hard time getting new financing this year, even before the COVID-19 and the weekend's OPEC fallout.

  • Moody's Investors Service warned in February that the likelihood oil and gas companies would see a wave of defaults was growing, the result of "continuing overproduction, depressed natural gas prices and widespread investor risk aversion toward the exploration and production sector."

Plus, the ratings agency said in a separate note in early February that the spike in energy junk-bond defaults last year was a “stalled not finished” cycle of fallout from the commodity crisis.

  • Debt-servicing problems have been “moving down the chain,” from exploration and production companies to oil-field services, support transportation, and midstream pipeline companies.

The big picture: Energy companies are the biggest issuers of junk bonds, accounting for more than 11% of the U.S. high-yield market.

  • “This was literally the last thing U.S. high-yield energy producers needed,” John McClain, a portfolio manager at Diamond Hill Capital Management, told FT. “There will be blood in the market on Monday.”

Go deeper: Oil prices plunge as market absorbs OPEC-Russia split

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