The US oil patch is heading for a debt conflagration like never before with more than one-third of industry facing bankruptcy, according to a recent Wall Street Journal survey.
Crude-oil prices plunged more than 5% on Monday to trade near $30 a barrel, making the specter of bankruptcy ever more likely for a significant chunk of the U.S. oil industry.
Three major investment banks—
Morgan Stanley, Goldman Sachs Group Inc. and
Citigroup Inc.—now expect the price of oil to crash through the $30 threshold and into $20 territory in short order as a result of China’s slowdown, the U.S. dollar’s appreciation and the fact that drillers from Houston to Riyadh won’t quit pumping despite the oil glut.
As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017, according to Wolfe Research…..
More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection so far during this downturn, according to law firm Haynes & Boone.
Morgan Stanley issued a report this week describing an environment “worse than 1986” for energy prices and producers, referring to the last big oil bust that lasted for years.
The current downturn is now deeper and longer than each of the five oil price crashes since 1970, said Martijn Rats, an analyst at the bank.Needless to say, the reason that this could be the worst oil industry crash since 1970 is that the bubble which preceded had no precedent, either. The central bank driven scramble for yield resulted in what amounted to an insane inflow of debt into an industry that is inherently risky and subject to massive cyclical swings in commodity prices.
Indeed, the juxtaposition of the 20004-2009 oil price chart with the staggering $150 billion debt increase in the North American E&P industry alone says it all. After the thundering $100 per barrel oil price collapse between July 2008 and early 2009, no honest and properly priced debt market would have ever advanced that much debt to shale and tar sands producers in a world where the marginal barrel from Saudi Arabia has a lifting cost of less than $15 per barrel.