articles Ratings /ratings/en/research/articles/190712-surging-distress-in-oil-gas-sector-may-foreshadow-a-second-reckoning-11061083 content esgSubNav
In This List

Surging Distress In Oil & Gas Sector May Foreshadow A Second Reckoning


U.S. Tech M&A, Investments, And Shareholder Returns Compete For Healthy Cash Generation In 2024


South And Southeast Asia Unicorns: A New Credit Story Post-IPO


China GRE Ratings List


Credit FAQ: How South And Southeast Asian Firms Will Fare As Currencies Depreciate

Surging Distress In Oil & Gas Sector May Foreshadow A Second Reckoning

After a relatively quiet 2018 for oil and gas defaults, the sector appears to be back in the spotlight this year with 10 rated oil and gas issuers downgraded to 'D' or 'SD' so far in 2019. Many of the more speculative names in the sector are exhibiting signs of distress and appear increasingly vulnerable to Chapter 11 bankruptcy, selective defaults or out-of-court restructurings. While hydrocarbon price volatility throughout the first half of this year is partially to blame, the lower echelon of rated issuers is also struggling to meet market demands of operating within internally generated cash flow and is experiencing investor fatigue due to disappointing returns. Moreover, with a tighter spigot for new financing, many companies are also facing liquidity constraints, refinancing concerns, and exploring various strategic alternatives often driven by disillusioned stakeholders.

It is not surprising that many of the sector's weaker links are survivors of the downturn that began in 2014. However, the underperformance of numerous reorganized issuers has been startling. After all, these companies emerged from bankruptcy with clean balance sheets and were remodeled to thrive in a "new normal",range-bound commodity price environment. This has hardly been the reality, as a significant number of recently reorganized companies continue to shed market value and face the possibility of a round-trip to the bankruptcy court.

Back From The Brink

The lower-rated companies able to circumvent the torrent of bankruptcies that hit the industry in 2015 through 2017 were typically those that benefited from a lack of immediate debt maturities, were able to significantly cut costs or sell non-core assets, successfully arranged alternative funding, and engaged in liability management exercises (typically in the form of distressed debt exchanges). While these actions helped prolong their runway, several holdouts have recently decided to throw in the towel (see Bristow Group Inc., PHI Inc., Weatherford International plc, and Jones Energy Inc.).

In the section below, we highlight some credits we dub the 'survivors'. Most of these fall within the 'CCC' rating category, and their debt trades at distressed levels.

Table 1

Oil & Gas: The Survivors
Rating/Outlook Stock Price Market Capitalization (Mil.$) Indicative Bond Price

California Resources Corp.

CCC+/Neg $ 19.25 939 74

Denbury Resources Inc.

CCC+/Neg $ 1.27 586 51

EP Energy LLC

CCC-/Neg $ 0.16 41 4

Hornbeck Offshore Services Inc.

SD/- $ 1.22 46 54

Jonah Energy LLC

CCC+/Neg N/A N/A 49

Pioneer Energy Services Corp.

CCC+/Neg $ 0.29 22 47

Sanchez Energy Corp.

CCC/Neg $ 0.10 10 4
Source: S&P Global Ratings, company reports. N/A--Not applicable. NOTE: Stock prices and market capitalizations are based on the July11, 2019 closing price. Bond prices are based on the company's lowest-priced material debt security.
California Resources Corp.

The highly-leveraged former spin-off of Occidental Petroleum Corp. will be dependent on oil prices and capital markets to address a heavy debt maturity schedule beginning in 2021. Given current market conditions and yields, this could be quite challenging, as high operating expenses and interest costs weigh down the company's ability to generate cash for debt repayment. California Resources' second-lien notes due 2022 currently trade at less than 75 cents on the dollar.

Denbury Resources Inc.

This carbon-dioxide enhanced oil recovery (CO2 EOR) operator's production stream consists almost entirely of oil, providing atypical leverage and sensitivity to oil pricing. During a period of higher pricing, this emboldened an ill-fated merger with Eagle Ford driller Penn Virginia Corp. in 2018. With that deal terminated, Denbury has turned its eye back to pushing out its subordinated debt maturities (via additional debt exchanges) and preserving liquidity on its undrawn revolving credit facility that is set to expire in 2021. The company's subordinated notes due 2023 trade at less than 55 cents on the dollar and its senior convertible notes due 2024 trade around 65 cents on the dollar.

EP Energy LLC

The Apollo-led leveraged buyout of EP Energy in 2012 has run its course and restructuring risk has greatly increased. Recent efforts to reduce debt through exchanges, open market purchases, and asset sales do not appear to have adequately fixed an overburdened capital structure as the company nears a significant bond maturity in May 2020. EP Energy's longer-dated unsecured notes due 2023 trade below five cents on the dollar.

Hornbeck Offshore Services Inc.

This Gulf of Mexico-focused offshore supply vessel (OSV) operator was able to stave off restructuring after arranging a $300 million term loan back in mid-2017 that has served as its primary source of liquidity. Since then, the company has taken on additional loans and methodically targeted its 2019-2021 maturity wall with a series of debt exchanges. But the OSV operating environment remains weak, and more than $650 million of notes is coming due in the next two years. Hornbeck's unsecured notes due 2020 and 2021 trade at 50 to 65 cents on the dollar.

Jonah Energy LLC

This Wyoming-focused natural gas producer has benefited from a strong hedge book, but financial metrics and liquidity are expected to weaken as favorable hedges roll off soon. Production growth will also likely be muted by a lower capital spending budget, while unsecured debt trading at less than 50 cents on the dollar heightens exchange risk.

Pioneer Energy Services Corp.

Aside from its inherent dependence on upstream activity levels, almost all of Pioneer's domestic drilling rigs will be up for re-contracting this year. Liquidity is limited, as the company approaches a potential springing maturity on its term loan in about two years and is unlikely to sell assets into a reluctant market. The oilfield services and contract drilling provider's unsecured notes are trading below 50 cents on the dollar.

Sanchez Energy Corp.

The Eagle Ford-centric E&P company has continued to struggle with operational issues and lower-than-expected production rates in the wake of its complex acquisition of the Comanche assets from Anadarko Petroleum Corp. in 2017. Management turnover and the addition of board members with turnaround experience points to elevated risk of a restructuring transaction. Sanchez's unsecured notes are trading at less than five cents on the dollar.

Recently Reorganized And Under Pressure

In theory, distressed companies who elude Chapter 11 put themselves at an economic disadvantage relative to reorganized entities due to their higher debt and interest burden. While this holds true, it is fascinating that many recently reorganized oil and gas companies have evidently not fared much better since emergence than the embattled 'survivors'. Based on market indicators such as equity capitalization and indicative debt trading levels, there appears to be a possibility that many of these companies could soon end up back in court for Chapter 22 proceedings—a euphemism for a second Chapter 11 bankruptcy filing. The table below displays a handful of names who have lost, on average, 65% of their market value since their post-reorganization shares began trading or after transformative events such as initial public offerings, spin-offs, or combinations, for instance.

Table 2

Reorganized Equities Losing Value
Company Predecessor Rating/Outlook Emergence/Other Closing Date Initial Stock Price Current Stock Price Change In Stock Price (%) Market Capitalization (Mil. $) Indicative Bond Price

Alta Mesa Resources, Inc.

Alta Mesa Resources / Silver Run II CCC-/Negative Feb. 2018 $8.63 $0.18 (98) 67 39

Basic Energy Services Inc.

Basic Energy Services B-/Negative Dec. 2016 $36.00 $2.20 (94) 59 79

Berry Petroleum Corp.

Linn Energy B/Stable Feb. 2017 $13.25 $10.33 (22) 846 100

Chaparral Energy Inc.

Chaparral Energy CCC+/Negative Mar-2017 $19.00 $5.81 (69) 269 62

Halcon Resources Corp.

Halcon Resources CC/Negative Sept. 2016 $10.85 $0.21 (98) 34 30
Harvest Oil & Gas Corp. EV Energy Partners LP NR Jun-2018 $15.00 $12.75 (15) 128 --
Midstates Petroleum Company, Inc. Midstates Petroleum Company NR Oct. 2016 $22.65 $5.79 (74) 118 --

Montage Resources

Magnum Hunter Resources / Eclipse Resources B-/Stable Feb. 2019 $16.02 $5.09 (68) 181 77

Pacific Drilling S.A.

Pacific Drilling CCC+/Negative Nov. 2018 $13.65 $11.48 (16) 861 98
Riviera Resources, Inc. Linn Energy NR Aug. 2018 $23.25 $12.58 (46) 823 --
Roan Resources, Inc. Linn Energy NR Sept. 2018 $17.50 $1.49 (91) 227 --
Sandridge Energy Inc. Sandridge Energy NR Oct. 2016 $19.50 $6.85 (65) 245 --

Ultra Petroleum Corp.

Ultra Petroleum CCC+/Negative Apr-2017 $12.12 $0.20 (98) 39 10
Source: S&P Global Ratings, S&P Capital IQ, Bloomberg.
NOTE: Stock prices and market capitalizations are based on the July 11, 2019 closing price. Bond prices are based on the company's lowest-priced material debt security. The emergence date is the date of exit from bankruptcy, spinoff, or other transformative event.

In particular, smaller producers across Oklahoma's SCOOP/STACK and Merge plays have been disproportionately eschewed by investors despite operating in a region that was billed as the second coming of the prolific Permian Basin not too long ago. The underlying reasons for this have been attributed to unanticipated rock complexity, higher weighting of natural gas production, and flawed spacing plans that led to interference among parent and child wells. These factors, along with others, have inhibited the post-bankruptcy experience for local E&Ps including Alta Mesa Resources Inc., Roan Resources Inc., and Chaparral Energy Inc. Tapstone Energy LLC, which is a private operator in the region, has also come under pressure with its bonds trading at approximately 65 cents on the dollar.

The selloff among these reorganized companies hasn't spared operators outside of the Mid-Continent, though. Halcon Resources Inc., which sold off its Bakken shale assets in order to reposition itself as a Permian pure-play, has again hired restructuring advisors as it contends with declining liquidity, covenant issues, and debt trading around 30 cents on the dollar. Ultra Petroleum Corp. is another interesting case where the company was arguably hamstrung by an aggressive valuation during its bankruptcy process, which left the Wyoming natural gas producer over-leveraged heading into an oversupplied gas market. Furthermore, the company's horizontal well tests bared limited success, and Management has reverted to an all-vertical drilling program. As a result, Ultra has cut guidance several times and has been actively pursuing debt exchanges in an effort to reduce leverage and push out bond maturities. Its unsecured and second lien notes are trading at roughly 10 and 45 cents on the dollar, respectively.

A Bet On Consolidation

Despite the challenges facing companies across the sector vertical, vertical, not all of its troubled participants are standing pat. In the first half of 2019 we've seen several noteworthy mergers or acquisitions among speculative-grade oil and gas companies that seem to be targeting cost synergies, operating efficiencies, and to some extent, supply correction. These include the Ensco Rowan plc (B-/negative) merger of offshore drilling rig operators; Comstock Resources Inc.'s (B/Stable) announced acquisition of fellow Haynesville gas producer Covey Park Energy LLC (B/Stable), and Keane Group Inc's (B+/Stable) proposed combination with previously reorganized oilfield services provider C&J Energy Services Ltd. The market has mostly reacted indifferently to the latter deal, while the Ensco/Rowan and Comstock/Covey transactions have received a lukewarm response, with debt at both entities continuing to carry double-digit percent yields.

To summarize, it appears none of the companies we've considered here are out of the woods yet, and market indicators are pointing to a high likelihood of bankruptcy for many of the downturn's survivors as well as a host of reorganized entities. Meanwhile, the jury is still out on whether contemporary consolidation initiatives will enhance viability for some of the industry's speculative-grade issuers.What we have repeatedly learned is that in most cases, where there is smoke there is fire. Barring a sharp reversal in commodity pricing, the sector could shortly be facing another reckoning.

This report does not constitute a rating action.

Primary Credit Analyst:Denis Rudnev, New York + 1 (212) 438 0858;
Secondary Contact:Thomas A Watters, New York (1) 212-438-7818;

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to:


Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in