Low oil prices, record volatility will hasten US energy defaults – Fitch

Early Tuesday morning in Asia, global rating giant Fitch released a note suggesting further hastening of the US energy defaults based on low oil prices, record volatility.

Key quotes

Low oil prices, caused by coronavirus-driven demand destruction and excess supply, and historic volatility due to storage concerns could accelerate US energy sector defaults, says Fitch Ratings.

Prolonged weakness in industry fundamentals combined with highly levered capital structures will not be sustainable for many US energy companies. Effects are widespread across upstream, downstream refining, oilfield services, and midstream transportation, storage, and wholesale. 

The US government is considering several alternatives to help struggling oil companies, including a lending program, taking equity stakes in exchange for some loans and/or easing credit rating requirements of the existing Federal Reserve bond-buying program.

We anticipate energy high-yield bond and institutional leveraged loan default rates at 17% and 18% this year, nearing the peaks of 19.7% and 25.4% set in January 2017 and January 2018, respectively.

This equates to a potential default volume of $33 billion for bonds and $10 billion for loans, nearly five times the average sector total from 2007 – 2019. Over the TTM, $24 billion of high-yield bonds and leveraged loans have defaulted, with Chapter 11 filings accounting for 57%, distressed debt exchanges/restructurings 27% and missed payments 16%.

Fitch cut its oil price assumptions in early April due to the effect of the coronavirus pandemic on the global economy and oil demand and the resulting very large oversupply. Our West Texas Intermediate (WTI) base case assumption is $32 per barrel (bbl) in 2020 and $42/bbl in 2021, while our stress case is $27/bbl and $32/bbl, respectively.

Market implications

Due to the early Asian session, markets fail to provide any clear reaction to the news. That said, NYMEX WTI Futures for June closed below $13.00, down over 23.00%, by the end of Monday’s trading session.