Posted on 12/22/2014 5:31:55 AM PST by thackney
America’s oil and gas boom was enabled by a huge pile of cheap financing. Many of the leading players in the boom, such as Chesapeake Energy and Continental Resources have for years been making capital investments at levels far surpassing the cashflow generated from operations.
The mountain of debt advanced to drillers in recent years is estimated to be in the neighborhood of $500 billion — some $300 billion in leveraged loans and another $200 billion in high yield debt. That’s about 16% of the U.S. high yield debt market, quadruple its share a decade ago. That’s a lot, even when weighed against the roughly $1.6 trillion in annual investment required to provide the people of the world with energy.
No surprise, as oil prices have plunged, yields on risky oil company debt have surged in recent months to three times their original yields at issuance. In September, the average energy high-yield issue yielded 450 basis points above Treasuries, according to Bloomberg . Now that premium has increased to nearly 950 bps. As a result, high yield funds have taken it on the chin. The Blackrock Corporate High Yield Fund, for instance, is down 8.25% in six months. According to S&P Capital IQ, leveraged oil and gas loans were trading above par as recently as June, but have since plunged to around 92 cents on the dollar on average, with some issues far lower. Analysts at CreditInsights see a jump in defaults from about 4% to around 8% of issues.
Oil companies had little trouble convincing lenders that these great tight oil plays like the Bakken and Eagle Ford and Permian are so vast, with so many thousands of drilling locations, that all they have to do is to keep drilling and drilling and drilling until eventually they will accelerate...
(Excerpt) Read more at forbes.com ...
Forgot to add: List of some specific companies seen in trouble at the link.
Good article. Thanks.
There are always small operators who will go out of business during downturns.
What I am more interested in is who will swoop in to pick up the assets of these.
The big boys are already evaluating the plums in these.
Don’t be surprised if the bulk of them come from outside the USA. Those fervently wish to learn more on unconventionals.
Downturns in the oil industry usually are a time of more mergers and acquisitions.
Oilfield history simply repeating itself.....remember 1982.
If you were here in South Texas and anywhere oil drilling and sales was king back in 1982 you will never forget what happened in that year when the price of oil fell below the “worst case” expectations of the financial industry.
Texas and all of the gulf coast states suffered an actual depression and those who worked for oil related industries suffered mightily...including myself and my business. The businesses that survived (including my own) learned a lesson in how to survive the next catastrophic failure of the oil industry that would surely come again.....and now it’s here.
Here in my area we live with the reality that the “bust or boom” of the oil business happens on a predictable schedule of every 10 to 15 years and plan our lives to deal with it by carefully managing our finances.
Or I may be completely wrong.
Oil M&A: Not So Fast
http://blogs.wsj.com/moneybeat/2014/12/16/oil-ma-not-so-fast/
What falling oil prices mean for energy M&A
http://fortune.com/2014/12/03/what-falling-oil-prices-mean-for-energy-ma/
Waiting game
Overall deal activity will decrease
We’ll see less investment from big oil
I remember back in the mid 1980’s there were two guys I worked with that owned houses in the Houston area. They had moved here to NH for work in 1983 but still owned the TX houses. They rented them for about 10 years. I think they finally sold them in the early 1990’s. Theses guys had both worked for Georgia Pacific in the wholesale lumber industry. Construction came to a halt.
In the last couple years there have once again been a boom of apartment complexes in TX. It has led the multifamily construction more than any other area of the country. I have traded lumber that went to several huge apartment projects in TX. It has greatly slowed in the last couple months. Somebody is going to get caught with a bunch of empty apartment buildings. History repeats itself.
Good article, thanks
Although many have been warning about this for years (ahem) I suppose now we will be treated to a mantra of “who could have known this would happen” ... and most probably calls for bailouts.
Apartments have been springing up like mushrooms in a cow pasture out here, along with trailer parks.
Got a dozer, clear a field and call it a RV park.
There is a saying in the oil field, we a bust every once in a while, to get rid of all the sons of female dogs.
No bailouts. No way.
Not even for those that pay my wages.
I visited an old camp for the Alaska Pipe line construction not too long ago and they had bumper stickers for sale..... Happiness is a Texan leaving, with an Okie under each arm
I wouldn’t be surprised if there were bailouts despite strong grass roots opposition. These are powerful people with political connections.
We’ve been thru this before folks.....oil dropped to below $10 PB in the mid 80s. We will see a leveling and some shake ups but thats the oil biz. Old line indies know this and ride it thru. Speculators and those that shouldnt even be near the oil patch will get hurt the most.
I can remember one I liked here in Houston: “Drive fast. Freeze a Yankee in the dark.”
I think you might be missing the point.
1. Chesapeake is no small player.
2. It is not the oil companies at risk here. It is financial institutions who are screwed. Sure the players can go bankrupt—but when they do they, and their debts, will be forgiven and they banks will be left holding the bags.
When those banks/financial institutions go crashing down...it could cause a domino effect that would make Lehman look like a summer picnic.
I am not saying it IS going to happen. I am saying it MIGHT happen.
Chesapeake is no small player.
But they have consistently been a high risk player and appears to have financial concepts that would have been admired by players in Enron, back in the Crooked “E” days.
Mineral owners know Chesapeake to be thieves.
The best job offer I never took was with Exxon in 1982, for just under $30k as a freshly minted engineer. I took a graduate research assistanceship for a year and got a MS instead. If I’d taken the Exxon job, I’d have been laid off almost immediately after being hired, and would have been looking at walking away from an apartment lease in Houston.
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