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Analysts warn of additional producer defaults, bankruptcies before year's end

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Analysts warn of additional producer defaults, bankruptcies before year's end

With a rising number of oil and gas exploration and production companies facing bankruptcy in 2019, analysts anticipate more credit defaults and Chapter 11 filings will occur across the sector before the year is out.

"I think 2019 [in terms of bankruptcies] is going to be a very interesting story, one that has yet to play out," Nik Foreman, senior credit analyst for underwriting and operations at Shell Energy North America (US) LP, said during a Sept. 18 webinar.

Many of the troubled firms that survived or reorganized following the 2014 crash in oil prices are again facing financial distress amid the same dire market conditions, said Bill Quadrini, product specialist for risk solutions at S&P Global Market Intelligence. These market conditions volatile energy prices, liquidity issues, tight capital discipline and high leverage — have already brought eight or nine producers into credit default and 26 companies into bankruptcy thus far this year, he said.

In a July 12 report, S&P Global Ratings said distressed companies that elude Chapter 11 put themselves at an economic disadvantage compared to reorganized entities due to their higher debt and interest burden.

However, because oil prices are still low and both the equity markets and private equity firms have turned off capital, many recently reorganized E&P companies have remained stressed, Quadrini said. These reorganized producers continue to lose market value and now face the possibility of renewed bankruptcy filings, he said.

With few options, some producers could find alternatives through divestitures or mergers, but these are likely to be few and far between since investors have had lukewarm responses for some of the recent larger acquisitions in the oil and gas sector, according to the July report from S&P Global Ratings.

"Gone are the days of irrational exuberance in terms of unlimited upside returns in the E&P space. I think the investment community has switched from more of a focus on returns to protecting capital and downside risk as it relates to their positioning within this industry," Foreman said.