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77% drop in probability of default score for oilfield services

Exploration, production risk metric drops by more than half

New York — Stock market investors' assessment of default risk in the oil and gas sector has been cut roughly in half despite the second quarter's string of bankruptcies, according to S&P Global Market Intelligence's market signal of default metric.

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The probability of default metric -- which combines stock market performance and finance fundamentals and functions under the logic that investors do not put money into failing companies -- spiked in March and April after oil prices plunged to record lows as coronavirus pandemic lockdowns crushed demand.

The biggest shift in the market signal metric in the second quarter was a 77% drop in the probability of default score for oilfield service companies. In April, S&P Global Market Intelligence scored the oilfield service sector as the riskiest, but the sector returned to the middle of the pack by the end of the quarter. Exploration and production companies returned to their customary spot as the riskiest oil and gas ventures by the end of the quarter, but even their risk metric dropped by more than half.

The S&P Global Market Intelligence PD Market Signal Model is a structural model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one- to five-year horizon. S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.

The shift in probability of default measures was in contrast to the negative outlooks from major credit rating agencies, all of which expected oil and gas defaults to continue through the rest of this year.

"The oil and gas patch was responsible for 30% of the quarter's defaults in Q2 -- nine bankruptcies, six distressed exchanges and a missed interest payment," Moody's said July 31. "Similar to the default trends observed during the 2015-2016 commodity crisis, once again the speculative-grade oil and gas sector drove defaults higher and will continue to do so through April 2021."

"Chesapeake Energy Corp.'s bankruptcy lifted the sector default rate to 13.2% at the end of June, a level last reached in April 2017," Fitch Ratings said July 13. "We anticipate the energy rate to hit 15% by July end and remain elevated to end 2020 at 17%."

"In North America, we expect a high number of defaults to continue as access to capital markets for lower-rated speculative-grade issuers remains limited and liquidity shrinks due to cuts to the borrowing bases of revolving credit facilities," analysts at S&P Global Ratings said July 23.