At 1600bps, the extra yield investors are demanding to take on US energy credit risk has never been higher. However, if a new report from Deloitte proves true, this is far from enough as they forecast roughly a third of oil producers are at high risk of slipping into bankruptcy this year as low commodity prices crimp their access to cash and ability to cut debt.
Record high US Energy credit risk...
The report, as Reuters reports, based on a review of more than 500 publicly traded oil and natural gas exploration and production companies across the globe, highlights the deep unease permeating the energy sector as crude prices sit near their lowest levels in more than a decade, eroding margins, forcing budget cuts and thousands of layoffs.
The roughly 175 companies at risk of bankruptcy have more than $150 billion in debt, with the slipping value of secondary stock offerings and asset sales further hindering their ability to generate cash, Deloitte said in the report, released Tuesday.
"These companies have kicked the can down the road as long as they can and now they're in danger of kicking the bucket," said William Snyder, head of corporate restructuring at Deloitte, in an interview. "It's all about liquidity."
Some oil producers are also choosing to liquidate hedges for a quick infusion of cash, a risky bet.
"2016 is the year of hard decisions, where it will all come to a head," John England, vice chairman of Deloitte, said in an interview.
For now, however, there is a corner of the market that offers perhaps a smidge of saefty...
Of the 53 U.S. energy companies that filed for bankruptcy last quarter, only 14 were service providers, a trend that is expected to continue in the short term, Deloitte found.
"Service providers tend to be more of a people business with less capital deployed, so it's easier for them to financially flex," Snyder said.
However, Snyder concludes...
"Eventually, though, they've got to run out of gas, too."