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. 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

Go deeper

Hotel industry warns of looming financial crisis

Illustration: Sarah Grillo/Axios

Hotel industry lobbying groups have fired a warning shot, exhorting lawmakers to provide them with financing to avoid a series of debt defaults they say could set off a widespread financial crisis.

Why it matters: Without the bailout — which would be in addition to government funds from the $2 trillion CARES Act — the industry says its members could be the first in a wave of debt defaults that would hit everyone from real estate investors and pension funds to average homeowners.

White House weighing aid for oil producers amid price collapse

Photo: Brendan Smialowski/AFP via Getty Images

The Trump administration is "strongly considering" federal assistance for U.S. oil producers facing distress due to the steep decline in prices, the Washington Post first reported and Axios has confirmed.

Why it matters: The twin forces of the novel coronavirus sapping demand and collapse of the OPEC-Russia production-limiting deal has created new jeopardy for companies, some of whom are already struggling financially.

Oil prices plunge as market absorbs OPEC-Russia split

A Kuwaiti trader checks stock prices at Boursa Kuwait in Kuwait City, on March 8, 2020. Photo: Yasser Al-Zayyat/AFP via Getty Images

Oil prices nosedived to four-year lows Sunday as trading resumed after Friday's collapse of the OPEC-Russia production-limiting pact, a rupture slated to increase supplies at a time when the novel coronavirus is sapping demand.

The state of play: The immediate 31% collapse when trading resumed last night was the second-largest on record behind the 1991 Gulf war, Bloomberg reports.