In heavy debt, US oil firms hit badly as prices collapse

Business Standard|March 22, 2020

In heavy debt, US oil firms hit badly as prices collapse
Major issuers of junk bonds to finance expansion, US energy companies are in deep trouble now

Wall Street supercharged America's energy boom of the past decade by making it easy for oil companies to finance growth with cheap, borrowed money. Now, that partnership is in tatters as the coronavirus pandemic has driven the fastest collapse of oil prices in more than a generation.

The energy sector has buckled in recent weeks as the global demand for oil suddenly shriveled and oil prices plunged, setting off a price war between Saudi Arabia and Russia. Oil prices are now one third their most recent high, trading as low as $24 a barrel, and could fall further.

The crisis has been a body blow to the American oil and gas industry. Already heavily indebted, many companies are now struggling to make interest payments on the debt they carry and are finding it challenging to raise new financing, which has gotten more expensive as traditional buyers of debt have vanished and risks to the oil industry have grown. Companies are increasingly turning to restructuring advisers to work through their finances, and the weaker businesses could end up filing for bankruptcy.

Collectively, the energy companies in the S&P 500 stock index are down roughly 60 per cent this year. Prices of bonds issued by US energy companies — both the safer investment-grade kind and riskier junk bonds — have plummeted, while their yields have skyrocketed.


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March 22, 2020