US oil exploration and production (E&P) firms are again seeing their access to debt capital markets shrink, after a slide in oil prices put worries about defaults back on the radar.
The price of WTI crude, the US benchmark, is down 18% this month, raising fears that banks will cut lines of credit in the next biannual review of asset-based revolvers this autumn.
That could push some of the most stressed E&P companies close to default, especially if - as many expect - oil prices remain depressed for the foreseeable future.
"Firms are approaching a period of greater stress as it has been over six months since the plunge in oil prices," UBS analysts Matthew Mish and Stephen Caprio wrote in a note to clients this week.
"Historically, energy company defaults rise nine to 12 months after price declines as hedges roll off and liquidity is used up."
Just a little more than a year ago, in June 2014, crude was north of US$110 a barrel, a level that naturally tempted many companies to forecast overly optimistic revenues - and dramatically expand expensive drilling operations.
But with the ink still drying on a nuclear deal with Tehran that will bring Iranian crude to market - not to mention waning Chinese demand - prices have kept plunging to under US$50 now.
The result is that even recently issued energy sector bonds, priced around April/May when crude was still up around US$60, have tumbled - in some cases by more than 20%.
The sell-off has effectively closed the door of the bond market for much of the energy sector, even for those that aren't strictly speaking E&P names.
Oil and gas services company Exterran, rated B1/BB-, withdrew a US$400m high-yield offering on July 24 and said a related spin-off of its international services business would be delayed. It blamed current market conditions.
"General appetite for new issuance in this sector is pretty limited now," one syndicate banker told IFR, saying that several investors had reached exposure limits to the sector.
Without access to capital - which was available in abundance earlier in the year - some credits will struggle, he said.
And some have already had to resort to dramatic measures.
Bellwether oil and gas name Chesapeake Energy suspended dividend payments as part of new belt-tightening measures announced this week.
The market saw the move as cause for serious concern - and Chesapeake's bonds plunged immediately.
"When people saw that, they thought: 'Wow. The company must be really worried,'" said one leveraged finance banker.
Overall in the sector, there seems to be plenty to worry about.
Twelve E&P companies in the high-yield energy indices have defaulted on bonds so far this year, notably including Sabine Oil & Gas and Quicksilver Resources - both of which filed for bankruptcy.
Research firm CreditSights is forecasting an average default rate of 8% for the energy sector both in 2015 and 2016, which it sees being overwhelmingly driven by E&P companies.
"Most (companies) have some runway and covenant flexibility," the syndicate banker told IFR. "But if hedges roll off, eventually you will have some defaults."
Some on the buyside expect lenders will be much less lenient in the next round of negotiations in the so-called "borrowing base determination", the review of asset-based revolvers - especially if crude prices remain low.
"Regulators are becoming more involved and more heavy-handed in their discussions with banks and their exposure to the energy sector," said Ken Monaghan, a high-yield portfolio manager at Amundi Smith Breeden.
"We wouldn't be surprised to see much more severe cuts during the fall redetermination period."
Meanwhile the E&P sector's dismal performance in the secondary market - which touched the 10.5% yield mark this week, according to UBS - reflects the sum of those concerns.
Year-to-date total returns, which were as high as 7.1% at the end of May, are now minus 1%, with most of those profits erased in the past month, Bank of America Merrill Lynch data shows.
April's jumbo unsecured bond from California Resources has plunged by as much as 20 points since then, while secured bonds, which offer investors a bit more security in the event of default, have also suffered.
A new secured note issued by Halcon Resources that same month is trading six points below reoffer, while SandRidge's print in May has also plunged 25 points.
Amid such turmoil, even solid Double B rated borrowers that have braved the capital markets have had a rough ride.
WPX, which sold a new bond last week, paid up to 100bp over its curve to raise US$1bn to fund an acquisition deal.
"As it relates to capital markets, everything is on pause," said the leveraged finance banker.
The acquisition comprised of a 49% equity stake in Aramco Oil Pipelines Co., a newly formed entity with rights to 25 years of tariff payments for oil transported through Aramco’s stabilized crude oil pipeline network.
Rice Acquisition Corp. II, the latest Daniel Rice-led SPAC, recently filed for an IPO to raise $300 million targeting a transaction in the “broadly defined energy transition or sustainability arena.”
The announcement comes on the heels of the formally announced Oil Sands Pathways to Net Zero initiative by a group of Canadian oil and gas producers, which analysts say screens favorably for the project.