Market Overview

The Downside Of Low Oil Prices Could Be A Wave Of Defaults

The Downside Of Low Oil Prices Could Be A Wave Of Defaults

Over the past five years, oil and gas companies have upped their debt by 55 percent in order to keep up with the industry’s fast-paced expansion.

But with oil prices at record lows, many companies are in danger of defaulting on their loans as the value of their inventories quickly diminishes.

Over the weekend, WBH Energy LP became the first in what analysts expect to be a stream of small drilling companies to file for bankruptcy protection. 

At the beginning of December, Deutsche Bank predicted that nearly 30 percent of B and CCC rated businesses would run into a cash flow problem if oil prices dropped below $55. Current crude prices have made their way below $50 per barrel, leaving gas companies unable to service their debt.

Large businesses like Exxon Mobil Corporation (NYSE: XOM) could weather the storm as income from other sources has protected their balance sheets, but those who have accumulated debt might be in for a bumpy ride.

Related Link: Pickens: Oil Will Be Back Above $90 In The Next 12-18 Months

Quicksilver Resources Inc (NYSE: KWK) is one name to watch. The company was downgraded by S&P in October and has a debt to operating income ratio of 12.6.

Canada’s Southern Pacific, meanwhile, is already working together with banks to try to sell the company or restructure some of its debt, as executives claim it doesn’t have enough cash to continue operating.

If crude prices continue their downward trajectory, most expect to start seeing a wave of defaults.

It’s possible that some of the larger, more stable companies will step in to acquire struggling businesses, but it's possible there will be a reluctance to sell at current valuations, and big firms may be cautious not to overpay.

Image credit: Mark Rain, Flickr


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