An ominous warning came from Moody’s this week—it’s concerned about the $32 billion wave of oil and gas industry debt that is coming due this year through 2024 in the U.S. Some of that debt involves Oklahoma oil and gas companies.
Concerns were mounting about the debt even before oil prices collapsed to a nearly 20-year low and the coronavirus outbreak spread into a global pandemic.
Now the outlook seems particularly grim for weaker companies needing credit, as drilling work dries up and oil prices collapse to about $20 a barrel, amid rising COVID-19 infections and Saudi Arabia and Russian threats to flood global markets with more crude output according to a report by Market Watch.
“The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets,” wrote Sreedhar Kona, a Moody’s senior analyst, in a report Wednesday.
Kona pointed out that smaller regionally or service-focused oil-field services companies “face the brunt of the sector’s weakness, and therefore the greatest refinancing risk.”
While the sector’s biggest investment-grade firms, Schlumberger Ltd SLB, -13.92%, Baker Hughes BKR, -13.77%, Halliburton Co. HAL, -24.91% and National Oilwell Varco NOV, -10.08% , offer other services that can offset slashed drilling activity, Moody’s warns that the bulk of the nearing maturities come from riskier, smaller players.
All told, speculative-grade, or “junk-rated” companies account for about 65% of the $32 billion of North American oil-field service debt maturing over the roughly two-year period.
Among the junk-rated companies, Transocean RIG, -17.16% has $4.3 billion of debt set to mature, while Valari VAL, -25.65% has $1.8 billion, Nabors Industries NBR, -17.43% owes $1.4 billion and Superior Energy Services SPN, -26.62% has $1.3 billion, per Moody’s.
The sharp sellloff in stock indexes deepened Wednesday, sending the Dow Jones Industrial Average DJIA, -6.30% tumbling below 20,000, leaving the blue-chip index down 30% on the year to date and erasing all of its gains since President Donald Trump’s inauguration in January 2017.
The energy-heavy $1.5 trillion U.S. junk-bond market, which often tracks the tone in equities, has seen heavy carnage too.
About a third of U.S. junk bonds were trading at distressed ratios earlier this week, indicating the market was expecting an 7.66% default rate over the next 12 months, up from Moody’s 4.4% forecast, according to Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors.
Breaking out only energy debt put expected defaults at 14.08%, or nearly double, he noted in a Tuesday research note.