The credit quality of oil and gas loans and bonds has improved significantly

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Significant oil and gas supplies, fueled by the shale revolution, followed by a sharp drop in oil and gas demand due to the COVID-19 crisis, has until recently brought oil prices and companies to their knees.

The last quarter saw the largest number of exploration and mining companies filed for bankruptcy since the first quarter of 2016.

As the economy reopens, good news for a beleaguered energy sector could be here until the pandemic deepens. Oil prices, a key indicator of the financial health of oil and gas companies, are currently approximately 71 USD, a level not seen since April 2019.

Today’s oil price level is up 255% compared to April 2020, when COVID-19 led to a sharp drop in oil and gas demand. For the second half of this year, the US Energy Information Administration forecasting an average of $ 72 for Brent crude.

Fitch’s US Leveraged Borrowing Default Analysis Published today by Fitch Ratings, the twelve-month average default rate in the energy sector is now 9.1%, up from 11.8% in June. This is the first time that the default rate has been below double digits since April 2020 and much lower than its peak probability of default of 20.3% in March this year.

Eric Rosenthal, senior director of leveraged finance at Fitch Ratings, does not expect “there will be many bankruptcies in the next few months. Only 2% of our Loans for leading market concerns refers to energy. Glass Mountain Pipeline is probably the most imminent bankruptcy. ” He also told me that his colleagues and he expect the energy credit line “at the end of the year to be only 5%.” This would be a significant improvement over the current 9% probability of default.

Rosenthal predicts a 2% probability of default on high yield bonds. “Energy is only 10% of our Bonds of greatest market concern list, up from 57% a year ago. Since the beginning of the year, there have been only $ 3.2 billion in default on high yielding energy commitments, up from $ 14.4 billion in the same period in 2020. ”

Rising oil prices have also eased concerns about lending to high-yielding North American oil and gas producers. According to Bill Holland of S&P Global Ratings, “speculative grade oil and gas emissions in the US will remain stable in 2021, with US primary issues of about $ 18 billion by June 30, as financing conditions remain extremely favorable even for lower prices. … rating issuers. In 2021, the output of speculative issues in the oil and gas sector is the highest since 2015. “

It will be important to watch how the new COVID-19 mutations affect the economy, which will inevitably affect the demand for oil and gas. According to the latest rating agency Fitch Ratings analysis“Oil demand has improved this year and is likely to continue to rise in 2H21 if vaccinations are successful and the restrictions associated with the pandemic are eased. New breakthroughs, especially new variants of Covid-19, remain the main risk for a sustained recovery in demand. “

Moreover, there are concerns that some banks have cut lending to the fossil fuel sector due to low yields in previous years, and now, possibly due to pressure from stakeholders over climate change concerns. Since the signing of the Paris Agreement, banks have financed oil and gas companies in total about $ 4 trillion… One third of the world’s systemically important banks (G-SIB) increased their lending to oil and gas companies. It is too early to say whether lending to banks will significantly decline at some point. And even if that were the case, it is likely that non-banking organizations such as private and venture capital would have stepped in to fund fossil fuel companies. I currently expect the credit quality of these companies to continue to improve.

Other energy articles by this author:

Energy companies account for over 25% of total US corporate defaults

Dodd-Frank – Catalyst for Better Risk Management for Utilities

Living in Uncertainty: Energy Companies and Dodd-Frank



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