By July 15, 2015 Read More →

Exploration and production bankruptcies drive up failure rate

Sabine Oil & Gas Corporation and Lightstream Resources Ltd., latest victims of lower oil prices, latest bankruptcies

Two more exploration and production companies have declared bankruptcy, causing the energy default rate to exceeds its long term average 1.9 per cent, according to Fitch Ratings.


Photo: Shaun T. Polczer.

Sabine Oil & Gas Corporation and Lightstream Resources Ltd. recently filed for Chapter 11 protection, driving the trailing 12-month (TTM) rate more than one-half point higher to 2.6 per cent and the E&P subsector rate to 5.1 per cent from 3.7 per cent, Fitch noted in a Wednesday press release.

The default rate includes issuers of high yield bonds in the U.S. irrespective of the issuer domicile, Fitch said in the release.

Significant decreases in oil and gas market prices have impaired many E&P companies’ ability to pay interest and principal and led to some defaults.

Both Sabine Oil & Gas Corporation and Lightstream Resources Ltd. had incurred significant debt to fund drilling programs and their capital structures became unsustainable in the face of lower oil prices, said Fitch.

Other significant E&P defaults this year include Midstate Petroleum Co., Connacher Oil & Gas Ltd., and Quicksilver Resources Inc.

Pro forma for the near term bankruptcy filing of Hercules Offshore, Inc., expected by Fitch because the driller is currently soliciting votes for a prepackaged bankruptcy plant, pushes the TTM energy default rate to 3.0 per cent.

Sabine filed for Chapter 11 on July 15 with an aim towards reaching a balance sheet restructuring plan with creditors. Sabine had approximately $2.8 billion of credit facility and $1.15 billion of bond debt outstanding as per the 10-Q filing for the quarter ended March 31, accord to Fitch.

The bonds are trading at under 20 per cent of par value, indicating the market currently anticipates weak recovery rates.

Sabine expects cash on hand and cash from operations will provide sufficient funding to sustain operations during the bankruptcy period with no debtor in possession facility needed. Cash balances were approximately $276.9 million as of May 8, Fitch noted in its release.

Lightstream defaulted via a distressed debt exchange on July 2. The company and certain holders of its unsecured debt agreed to exchange approximately $465 million of 8.625 per cent unsecured notes due 2010 for $395 million of 9.875 per cent second lien notes due June 15, 2019. Holders of the 8.625 per cent notes that did not participate in the debt exchange became subordinated in the capital structure to the new second lien debt. Lightstream has high capital spending needs to maintain production, according to Fitch’s release.

Hercules reached a restructuring support agreement with a group of senior noteholders holding more than 67 per cent of the senior note debt and is currently soliciting votes for a prepackaged plan of reorganization. A near-term bankruptcy filing seems highly probable.

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