The latest crash in oil prices is threatening to push $140 billion of investment-grade energy debt over the edge into junk. Despite the modest recovery after 2016, oil prices have been capped by plentiful global supplies, and at the same time the U.S. shale sector has exhausted the patience of many equity investors with consistently poor returns. Now, the industry has been blindsided by the double whammy of a supply shock from the coronavirus and an oil price war, and President Donald Trump’s efforts to prop up prices is unlikely to offset more expected supply from major producers.
That’s left exploration and production companies in a weaker position coming into the latest crisis, with WTI crude hovering near $30 a barrel. Those including Occidental Petroleum Corp., as well as Apache Corp. and Marathon Oil Corp. are cutting spending wherever possible, but bond traders seem to have already made up their minds — some of these companies’ debt, and that of others, is trading around 70 cents on the dollar, a far cry from near par where most traded just a few weeks ago.
“When you have these investment-grade companies trading in the 60s, 70s, and 80s, that tells you that the market certainly doesn’t look at them as investment grade,” said James Spicer, a high-yield analyst at TD Securities focused on energy. “It looks at them as distressed names that have real default risk.”
It may be too late for oil producers to refinance their way out of this one. Capital markets have been mostly shut for weeks as corporate debt traders price in a greater chance of recession, only opening up in small windows for the highest-quality borrowers in safe-haven sectors like utilities. If companies can’t service their debt, the possibility of downgrades pales in comparison to the threat of default.