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Highlights

Some companies may not escape financial trouble this year

To lower costs, some companies have struck merger deals

Houston — The number of oil and natural gas companies in financial distress is starting to rise as investors lose interest, access to more credit is throttled, and companies struggle to live within cash flows, S&P Global Ratings said in a look at the finances of exploration-and-production companies midway through 2019.

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Consolidation through mergers that lower costs may not prove to be a solution as oil and gas prices stay low, the credit rating agency said, and bankruptcy may be the only option, even for companies that declared bankruptcy during the 2015-2017 oil price trough.

"After a relatively quiet 2018 for oil and gas defaults, the sector appears to be back in the spotlight this year with 10 rated oil and gas issuers downgraded to 'D' or 'SD' so far in 2019," S&P Ratings said in a July 12 note. "D" and "SD" are ratings for companies that are in default or have chosen not to make a debt payment, resulting in a selective default. "While hydrocarbon price volatility throughout the first half of this year is partially to blame, the lower echelon of rated issuers is also struggling to meet market demands of operating within internally generated cash flow and is experiencing investor fatigue due to disappointing returns."

S&P Ratings said a small group of distressed companies, survivors of the 2015-17 meltdown, may not escape financial trouble in 2019 as debt maturities loom and commodity prices remain low.

A second, larger group of companies went through at least one reorganization through the bankruptcy courts and now may be looking at Chapter 11 again.

"Based on market indicators such as equity capitalization and indicative debt trading levels, there appears to be a possibility that many of these companies could soon end up back in court for Chapter 22 proceedings --a euphemism for a second Chapter 11 bankruptcy filing," S&P Ratings said.

Several companies in the second group of reorganized firms have run aground in Oklahoma's SCOOP and STACK shale plays, S&P Ratings said, as the geology proved more complex than assumed, production volumes were weighted to natural gas over oil, and wells drilled too close together interfered with one another.

"These factors, along with others, have inhibited the post-bankruptcy experience for local E&Ps including Alta Mesa Resources Inc., Roan Resources Inc., and Chaparral Energy Inc.," S&P Ratings said. "Tapstone Energy LLC, which is a private operator in the region, has also come under pressure with its bonds trading at approximately 65 cents on the dollar."

Oil and gas companies are not waiting to be run over by the bankruptcy truck and several have recently merged to lower costs, S&P Ratings said, notably Haynesville Shale gas producer Comstock Resources' deal to buy Covey Park Energy. Market reaction to Comstock's deal was "lukewarm," S&P Ratings said, and consolidation may not come in time for the most distressed firms.

"The jury is still out on whether contemporary consolidation initiatives will enhance viability for some of the industry's speculative-grade issuers," Ratings said. "What we have repeatedly learned is that in most cases, where there is smoke there is fire. Barring a sharp reversal in commodity pricing, the sector could shortly be facing another reckoning."

-- Bill Holland, S&P Global Market Intelligence, newsdesk@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com