Energy companies are defaulting at a pace not seen in three years, with the bankruptcy filing Monday of Extraction Oil & Gas being the latest sign of industry pain in the Covid-19 pandemic.
The energy default rate now stands at 11.2 percent — the highest since April 2017 — and will rise to about 17 percent by the end of this year, Eric Rosenthal, senior director with Fitch Ratings, estimated in an emailed statement Monday. “Imminent bankruptcies from California Resources and Chesapeake would lift the rate above 14 percent.”
The energy sector is driving U.S. default rates as oil producers, hit hard by the pandemic, struggle to meet their debt obligations, according to Fitch. Crude prices have plunged as energy demand collapsed in the crisis, falling from levels that had never fully recovered from the oil bust in 2014.
“After months of liability management and careful analysis of our strategic options, we determined that a voluntary chapter 11 filing with key creditor support provides the best possible outcome for Extraction,” Matt Owens, chief executive officer of the Denver-based oil producer, said in a statement Monday.
A spokesperson for Chesapeake Energy, an oil and gas driller based in Oklahoma City, declined to comment on a potential bankruptcy filing. A California Resources spokesperson referred a request for comment to a March 27 statement by the oil and gas producer that it was “fighting hard for the best outcome for our shareholders” and would continue to weigh all options as it worked through the “unprecedented downturn.”
Private equity-owned oil and gas companies have also struggled this year.
For example, Gavilan Resources, a Houston-based producer backed by Blackstone Group, filed for bankruptcy protection in mid-May, according to Texas court documents. In April, private equity firms Quantum Energy Partners and NGP Energy Capital asked a Texas regulator to intervene to help salvage the oil industry after the pandemic destroyed energy demand.
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Companies across sectors have defaulted on $38.4 billion of high-yield bonds this year, up 139 percent compared with 2019, according to Rosenthal. Default volume for leveraged loans has risen to $37 billion in 2020, soaring 239 percent from last year, he said in the emailed statement.
Fitch is forecasting defaults will climb to as high as 6 percent this year under its base-case scenario, and as high as 10 percent in its “severe case.” That compares with a current default rate of 4.7 percent.
Meanwhile, the U.S. government is providing unprecedented support to help companies during the pandemic and keep credit flowing to them. For example, the Federal Reserve Bank of New York said Monday that it would begin buying U.S. corporate bonds on June 16, using the Secondary Market Corporate Credit Facility it had earlier announced as part of its emergency response to the Covid-19 crisis.
