With a "staggering" $86 billion in debt coming due in the next four years, North American oil and gas producers — particularly pure-play natural gas drillers — are at a higher risk of default as the credit window slams shut amid low commodity prices, credit rating agency Moody's said Feb. 19.
Bond investors got burned once in the oil price crash of 2015 and are not eager for a repeat, Moody's said. "Creditors now demand higher risk premiums to be compensated for the producers' elevated commodity-price risk, uncertainty around their future cash flow, and growing public and governmental efforts to limit the use of fossil fuel globally."
Investment grade debt accounts for 38% of the total but is front-loaded into the first three years, while weaker, more speculative grade maturities lie further out on the timeline, giving riskier companies more time to repair their balance sheets with asset sales and other measures, Moody's said.
Despite the later maturities, speculative grade companies start seeing their bonds come due in a rush starting in 2022 and that debt will be competing with other liabilities such as credit revolvers, which add to the refinancing burden, the credit analysts at Moody's said.
The debt of shale gas producers, mostly located in Appalachia, is the least likely to be refinanced at any acceptable rate, given low natural gas prices far out on the futures strip, Moody's said. "Such companies face greater risk because of continuing overproduction, depressed natural gas prices, and widespread investor risk aversion toward the E&P [exploration and production] sector," Moody's said.
Moody's said that big gas producers such as EQT Corp., Chesapeake Energy Corp. and Antero Resources Corp. need to take strong action now to avoid crashing into the debt wall later. "While these companies have already taken some measures to address maturities, more needs to be done."
"Refinancing costs will remain sky-high for these producers without a sharp rebound in gas prices, which seemed improbable as of early 2020," Moody's said. "Debt investors studying the refinancing prospects of these E&P companies have already begun pushing their debt prices to distressed levels, effectively cutting them off from raising capital."
The shale gas producers can still cut back on spending, sell some assets and start exchanging their debt at discounted prices to avoid going into default, the credit rating agency suggested.
Moody's believes the large, investment grade producers in the group will be able to refinance or repay their bonds over the next four years, particularly the largest, Occidental Petroleum Corp. with $14.1 billion worth of bonds coming due following its 2019 purchase of Anadarko Petroleum Corp.
Occidental, EOG Resources Inc. with $3 billion due, and Canadian Natural Resources Ltd. with $4.6 billion due "should easily be able to refinance or repay maturities based on their strong balance sheets and the ability to generate strong free cash flow even in a low oil price environment," Moody's said.