Missed interest payments and distressed debt exchanges by three U.S. oilfield services providers in August kept the global oil and gas sector as the top sector for defaults in 2020, S&P Global Ratings said Sept. 3.
Oilfield parts and services suppliers are watching sales and revenues nosedive as oil and gas drillers slash their spending and activity as U.S. oil demand remains subdued as a result of the coronavirus pandemic, Ratings said.
"The oilfield services sector continues to face weak demand," Ratings said Aug. 19 as it rated Forum Energy Technologies Inc. CCC-plus with a negative outlook after the company exchanged $315 million of existing unsecured notes for 9% convertibles due in 2025, an exchange Ratings called a selective default because it did not make current noteholders whole.
"We expect oil and gas drilling and completion activity to remain subdued at least through the remainder of 2020 and likely in the first half of 2021, as producers take a cautious approach to increasing activity levels — particularly onshore North America," Ratings said.
Ratings also said offshore drilling giant Transocean Ltd.'s Aug. 6 swap of $356 million worth of exchangeable bonds for $213 million of bonds due at a higher rate in 2027 was selective default. "The higher interest rate and additional guarantees are insufficient compensation to offset the extended maturity and 40% discount to par," Ratings said. "In addition, the company is facing a high risk of conventional default over the near to medium term."
The third oilfield services company to default was privately held parts supplier UTEX INDUSTRIES INC., which missed interest payments on is first- and second-tier lien loans and chose not to repay its bank revolver, Ratings said Aug. 10.
A fourth credit default closely associated with oil and gas was petroleum products terminal operator Martin Midstream Partners LP's Aug. 14 below-par tender for $365 million worth of notes due in 2021. Ratings graded the MLP a B-minus on Aug. 26, noting the financial strength of its fixed-price contracts. "The majority of Martin's contracts across all of its business segments consists of fixed-fee commitments with a diversified customer base," Ratings said. "Martin's customer portfolio includes both small midstream players and large integrated oil and gas companies. Martin's weighted-average customer life of about 16 years further strengthens its contract profile."
With 33 defaults this year, oil and gas leads the global default tally, Ratings said, followed by consumer products with 27 defaults and media and entertainment, with 25 defaults.
While the place of defaults slowed slightly in August, Ratings said that is typical of any year. The credit rating agency was gloomy about the any improvement in the default rate this fall. "We expect the pace of defaults to pick up amid the continued impact of COVID-19 on economic and credit conditions," Ratings said.
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