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

A large supply of oil and gas aided by the shale revolution, followed by falling demand for oil and gas due to the COVID-19 crisis, has brought oil prices and businesses to their knees until has recently.

The last quarter saw the highest number of bankruptcy filings from exploration and production companies since the first quarter of 2016.

As the economy reopens, good news for the besieged energy sector may be here until the pandemic worsens. Oil prices, a key indicator of the financial health of oil and gas companies, currently sit around $ 71, a level not seen since April 2019.

The current level of oil prices is up 255% from April 2020, when COVID-19 brought down demand for oil and gas. For the second half of this year, the US Energy Information Administration is forecasting an average of $ 72 for Brent crude oil.

Fitch US leveraged loan defaults analysis published today by Fitch Ratings, shows that the twelve-month default rate for the energy sector now stands at 9.1%, down from 11.8% in June. This is the first time the default rate has been below double digits since April 2020 and well below its peak default probability of 20.3% in March of this year.

Eric Rosenthal, Senior Director of Leveraged Finance at Fitch Ratings, does not expect “many bankruptcies to come in the coming months. Only 2% of our Most Concerned Loans for the Market concerns energy. Glass Mountain Pipeline is possibly the most imminent bankruptcy. He also told me that he and his colleagues expected an energy leveraged loan to “end the year at only 5%.” This would be a significant improvement over the current default probability rate of 9%.

Rosenthal predicts a 2% probability of default on high yield energy bonds. “Energy only represents 10% of our Obligations of greatest concern to the market list, up from 57% a year ago. There have been just $ 3.2 billion in high-efficiency energy faults since the start of the year, up from $ 14.4 billion for the same period in 2020. “

Rising oil prices also allayed credit concerns for North American high-yielding oil and gas producers. According to Bill Holland of S&P Global Ratings, “Speculative grade US oil and gas issues remain robust in 2021, with nearly $ 18 billion in US primary issues through June 30 as financing conditions remain. extremely favorable, even for rated issuers. So far in 2021, speculative grade emissions in the oil and gas sector are the highest since 2015. “

It will be important to observe the impact of the new changes of COVID-19 on the economy, which would inevitably have an impact on the demand for oil and gas. According to a recent analysis by Fitch Ratings, “Oil demand has improved this year and is expected to continue growing in 2H21 if vaccination deployments are successful and pandemic-related restrictions are relaxed. New outbreaks, especially new variants of Covid-19, remain the main risk for the sustained upturn in demand. “

In addition, there are concerns that some banks have cut lending to the fossil fuel sector due to low yields in previous years, and now, perhaps due to pressure from stakeholders over concerns about climate change. Since the Paris Agreement, banks have financed oil and gas companies totaling around $ 4 trillion. A third of the world’s systemically important banks (G-SIBs) have increased their lending to oil and gas companies. It is too early to tell if at some point bank lending will decrease significantly. And even if that were the case, it’s likely that non-bank entities, such as private equity and venture capital, would step in to fund fossil fuel companies. For now, I anticipate that the credit quality of these companies will continue to improve.

Other energy articles by this author:

Energy companies account for over 25% of total U.S. business failures

The volume of defaults of US companies, especially in the energy sector, is worse than in 2009

Dodd-Frank, a catalyst for improving risk management in energy companies

Living With Uncertainty: Energy Companies and Dodd-Frank

‘Oil and gas in the world of capital cities’

EdP’s international ambitions

Main challenges of investments in the electricity sector in Russia

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