This Spotlight from S&P Global Platts Analytics was first published June 4
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The low oil price environment is causing hardship for US operators as NYMEX light, sweet crude trades around $35/b.
In reaction to the sharp decline in oil prices, 38 US operators have revised 2020 capital expenditures by 36%, a reduction of $41 billion, but it appears the revisions have finally stabilized.
A large part of the spending cut was reducing the amount of drilling and completion activity: US horizontal oil rigs are down 67% and fracking crews are down 82% from mid-March levels. In May, drilling activity continued its decline but at a slower pace, as operators decommissioned rigs at an average of 25 rigs week-over-week, an improvement compared with April's average decline of 65 rigs W/W.
This is likely a sign that rigs are approaching their floor and the expectation is that they will stay around the 300 rig level until early 2021. A significant increase in rig activity isn't expected until 2022, which is largely reflected in the latest operator guidance reports.
For many companies, a reduction in capex won't be enough to survive the low oil price environment. S&P Global Ratings and S&P Global Platts have identified 29 companies (17 exploration and production companies and 12 oilfield services companies) that have defaulted on debt, with several of them filing for bankruptcy due to financial hardship.
One of the first, and largest, E&P companies to file for Chapter 11 bankruptcy protection was Whiting Petroleum on April 1. The company has been focused on drilling in North Dakota's Williston basin. The company hopes to reduce a significant amount of its debt and establish a more sustainable capital structure moving forward. With a recent draw on its credit facility of $650 million, the company plans to continue its daily operations with minimal interruptions.
In the OFS sector, Pioneer Energy Services had to abandon drilling in the Bakken after 20 years of service, mainly due to one of its largest customers, Whiting Petroleum, filing for bankruptcy earlier this year.
Diamond Offshore Drilling filed for bankruptcy on April 26. Low oil prices are causing problems for shale producers, but offshore drilling brings a unique concern of long-term capital intensive commitments combined with a slow return on investment.
More companies are likely to default based on the amount of debt due in 2021-2022, as shown in the graphic below. However, there have been a couple of companies (Chevron, Exxon Mobil) that were able to restructure their debt in an effort to lower interest rates and spread out debt maturities over ~30 years. In the short-term (pre-2030), the companies were able to take advantage of low rates (~1.5%) while long-term (post-2030) rates were closer to 3%.