Defaults by US oil and gas producers are set to outstrip all other sectors again in 2021 as an industry battered by this year’s price crash faces yet more pain, according to a forecast from a rating agency. Energy will account for $15bn-$18bn of US high-yield bond defaults in 2021, Fitch predicted. That is more than double both healthcare and industrials, the next most affected sectors, the rating agency said.
The volume will be well below the $48bn racked up by energy companies in the past year, which at 41 percent of the total was also by far the largest of any sector. But the persistence of elevated distress levels will dash hopes of a respite for the industry after one of its toughest years in recent history. “Low crude oil prices coupled with capital market accessibility will likely hamper many of the weaker energy issuers in 2021,” said Eric Rosenthal senior director of leveraged finance at Fitch.
The default rate in the energy sector is likely to be 7-8 percent in the coming year, according to Fitch, down from more than 15 percent over the past 12 months — the highest since 2017 — but well above the historical average of 4-4 percent. The US oil industry was thrown into turmoil in 2020 after the Covid-19 pandemic crippled global demand, just as the market was flooded with Saudi crude.
Producers were forced to slash spending, shut wells and lay off workers and the lower output further depressed cash flow, leaving operators with less money to pay down debt. High profile casualties included Chesapeake and Whiting. Services providers were hit especially hard as operator cutbacks left them out of work.