Reuters: Chesapeake Energy braces for possible bankruptcy

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(CNN) – In addition to the coronavirus pandemic, the oil crash could be catastrophic for over-indebted shale oil companies.

the oil industry downturn laid bare just how much America’s rise to superpower status in the energy world has been made possible by easy money. Virtually unlimited borrowing has enabled shale companies to dramatically increase production, whether it is needed or not.

Excluding junk bonds from the market will tip the scales the weakest bankrupt players, risking countless US jobs along the way. This is what happened during the last oil crash that started in 2015.

The impending bankruptcies of the oil plates underscore the fragile state of the booming industry even before the coronavirus crisis.

“These companies were in trouble before COVID-19 happened,” John Kempf, senior director of Fitch Ratings, told CNN Business. “After 2015 and 2016, they never really rebuilt their balance sheets. When the stress hit, they weren’t prepared for it.

Despite a recent rebound, US oil prices have imploded three-quarters since early January, to just $ 15 a barrel. The crash was sparked by oversupply, particularly from Russia and Saudi Arabia, and an unprecedented collapse in demand due to the coronavirus pandemic.

There is so much crude that the world is running out of space to store it all. This conundrum caused crude to drop well below zero last week, marking the first case of negative oil prices since the launch of futures contracts in 1983.

$ 43 billion in energy bond defaults

Prices are so low that Rystad Energy has warned that hundreds of U.S. oil exploration and production companies could file for bankruptcy by the end of 2021.

The wave of bankruptcies has already started. Earlier this month, Whiting Petroleum filed for bankruptcy, marking the first high-profile Chapter 11 filing of the current crisis. Diamond Offshore Drilling joined the bankruptcy club on Sunday. Diamond, which supplies offshore drilling rigs to Hess, Occidental and BP, was posting losses months before the crisis.

Fitch Ratings warns that more than $ 43 billion of high yield bonds and leveraged loans in the energy sector will default in 2020. For the context, this is nearly five times the average level of industry default over the past twelve years.

Moody’s Investors Service lowered its short-term oil price assumptions this week, predicting that U.S. oil prices will now average just $ 30 a barrel in 2020, too low for virtually any company. American shale oil is making a profit. Moody’s predicts U.S. crude will drop to just $ 40 in 2021.

“Financial risk is increasing and will likely remain very high for all top-rated oil and gas issuers,” Moody’s wrote in the report.

Chesapeake Energy in Danger

The energy sector tops Fitch’s Top Bonds of Concern list of troubled bonds, accounting for 60% of the list.

Fitch warned that several of these companies “could be imminent failures,” including Chesapeake Energy, the shale pioneer that recently moved from a focus on natural gas to a target on oil.

Reuters reported Chesapeake is preparing a potential bankruptcy filing on Wednesday and held talks with creditors about a possible loan to keep business going while navigating Chapter 11 proceedings. The company did not respond to a request for comment. .

Chesapeake’s share price has slumped more than 80% this year. In order to keep its shares above the minimum of $ 1 required by the New York Stock Exchange, Chesapeake recently launched a Reverse share split 1 for 200. The shale company also quarterly dividends suspended on preferred shares, noting that the movement “does not constitute a default” under debt instruments.

California Resources, another oil company Fitch reported as a potential default, suffered a 76% drop in its shares this year. The energy company has reduce expenses to the bone, keeping just the bare minimum necessary for “mechanical integrity”.

In response to market speculation about its fate, California Resources released a declaration last month, stating that he “is fighting hard for the best outcome for our shareholders and other stakeholders”.

Fitch also cited a high default risk at Denbury Resources, an oil and gas driller focused on the Gulf Coast and Rocky Mountain regions. Denbury’s stock has fallen more than 70% this year. Last month, the company cut its capital budget by almost half.

Other companies that could imminently default on their debt include Chaparral Energy, Colorado-based Jonah Energy, Bruin E&P Partners and Vine Oil and Gas, Fitch said.

“Nervous” lenders

No one wants to lend to a shale oil company that can’t generate free cash flow at a low price. This makes it difficult for frackers to renew existing debt before it matures.

“There is no access to capital markets to refinance. Lenders are reluctant to give money to this industry, ”said Kempf, director of Fitch.

In addition, there is investor fatigue as the energy industry has been struggling for years. The energy sector of the S&P 500 has been the worst performing – by far – over the past decade.

“The portfolio managers are tired of the volatility of oil and gas prices. They don’t want to be in the business anymore, ”Kempf said.

Washington to the rescue?

A big joker is that of President Donald Trump promise to save the oil industry. Trump tweeted on April 21, a day after crude turned negative, that he asked officials to “formulate a plan” to “make funds available” to oil and gas companies.

“We will never let the big American oil and gas industry down,” the president said.

Treasury Secretary Steven Mnuchin said last weekend that the Trump administration was considering providing a “loan facility” to the energy sector.

“We are looking at a lot of different options and we haven’t come to any conclusions,” Mnuchin said. told Bloomberg News. No concrete details have been released on what this program might look like.

Analysts said oil companies with strong investment-grade credit ratings are likely to have access to these emergency funds.

“We can only give loans to creditworthy entities in the hope that the loans will be repaid,” Federal Reserve Chairman Jerome Powell said on Thursday, speaking generally of the central bank’s lending capabilities. .

But it’s not clear whether shale oil companies rated as garbage will have access to the funds they need to survive due to their precarious financial conditions.

“I don’t count on that to protect me from faults,” Fitch’s Kempf said. “A lot of these companies couldn’t access capital markets even before COVID.”

About Marc Womack

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