Worst May Be Behind for Energy Borrowers Facing Loan Renewals

Don’t expect too much bad news when banks complete their assessment in October of the amount of credit they will continue offering to distressed energy companies.

About six to 12 E&P and oilfield-services firms may file for bankruptcy during the rest of the year, projects Haynes & Boone partner Buddy Clark, who is a co-chair of the firm’s Energy Practice Group. That’s down from 17 borrowers from the sector that have filed for bankruptcy so far this year with liabilities of about $14.9 billion, according to data compiled by Bloomberg.

While energy companies continue to struggle with a slump in commodities, for many, the worst may be behind. About $23 billion of energy sector debt was trading at levels considered distressed last month, according to Bloomberg Intelligence. That’s down from a peak of $140 billion in the first quarter of 2016.

That’s far cry from a wave of credit-line cuts that in the past has left producers scrambling to raise cash to keep drilling, or in some cases, to pay down overdrawn loans. The credit lines typically are reset each spring and fall.

"We’ve hit the bottom of defaults," said Steven Oh, global head of credit and fixed income at PineBridge Investments. "By and large, it’s over."

However, companies in the deep-water drilling segment and other high-cost production services have yet to go through "a downturn that is nowhere near recovery," Oh said.

While most distressed energy companies “don’t need to worry about debt maturities in the next 12 months, that will change dramatically by the end of 2018,” Spencer Cutter, a Bloomberg Intelligence analyst, wrote in a note last month.

Oil Hedges

EP Energy Corp., which has oil hedges rolling off by year end, is one company particularly exposed, according to Cutter. Other firms whose credit lines will be under review include California Resources, Denbury Resources, Northern Oil and Gas and W&T Offshore, he said.

Oil in New York has been unable to hold a rally above $50 a barrel this month as investors weigh rising global supply against output cuts by the Organization of Petroleum Exporting Countries and its allies.

The prolonged period of pricing trough may be too difficult to bear for some borrowers, said Ian Peck, a partner at Haynes & Boone.

Despite this, the industry has found new stability at current price levels.

“No one is expecting any big surprises come October, just as there weren’t any big surprises in April," said Emanuel Grillo, a partner at law firm Baker Botts.

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