WTI is back above $50 a barrel, and things are looking up for the battered U.S. oil industry. Yet, although the worst may be behind drillers, they still face a lot of difficulties, including the danger of more loan defaults.
Fitch Ratings warned about the continued threat of defaults in a recent update, noting the oil and gas industry would this year again be the one with the most defaults, according to a report by the Financial Times. In light of the troubles plaguing other industries hit hard by the pandemic, such as air travel and real estate, this is saying something.
Last year, several dozen oil and gas operators filed for bankruptcy with a cumulative debt of $28 billion, which far outstripped the cumulative debt of any other industry. This year, according to Fitch, the amount of debt in default will be lower, estimated at $15-18 billion, but it will still make oil and gas the worst performer in loan servicing.
The forecast of the ratings agency is in tune with other recent updates about what the immediate future holds for U.S. oil and gas. Rystad Energy, for instance, last month warned that the wave of bankruptcies that ravaged U.S. shale will lead to a sizeable production loss this year to the tune of 200,000 bpd. This will certainly be good for prices and therefore for other producers. However, the prospect of further defaults also has grim implications for those that survive.
“Low crude oil prices coupled with capital market accessibility will likely hamper many of the weaker energy issuers in 2021,” the Financial Times quoted Fitch leveraged finance senior director Eric Rosenthal as saying.
The second part of the statement is the more important one. Access to capital—borrowed capital, more specifically—has been getting tighter. The reasons for this tightening include U.S. shale oil’s cash-burning habits that had banks worried about debt redemption, growing investor discontent with the level of returns, and, finally, banks’ green pivot that has seen them become even more reluctant to lend to the oil and gas industry. Related: India Oil Demand Falls For First Time In 20 Years Due To COVID
In fact, banks have gone so far in their attempts to signal virtue amid a strong anti-oil public discourse that they recently asked a federal regulator to cancel a proposed rule that would oblige them to continue doing business with the oil and gas industry.
The Office of the Comptroller of the Currency proposed the rule aiming for fair access to financing for all industries earlier this month, seeking to finalize it soon. Wall Street said that “would also appear to prohibit banks from using subjective judgment and qualitative considerations, including reputational risk, in deciding whether to provide a financial service, which is entirely inconsistent with how the OCC has historically expected banks to make risk management decisions.”
Banks, in other words, are worried that if they continue lending to oil and…
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