The trailing 12-month (TTM) U.S. high yield default rates for the exploration and production (E&P) and energy sectors will both increase in March as oil-related bankruptcy filings take their toll, according to Fitch Ratings.
At end-February 2015, the TTM default rate for both sectors stood at 0.5%. However, bankruptcy filings for Dune Energy and Quicksilver Resources, along with American Eagle Energy's missed payment will push the E&P default rate back toward its historic average of 1.9%. As a result, the broader energy sector default rate will also increase to 1%. Fitch expects the energy sector default rate to remain above its historic average, as the shale revolution has allowed the entry of many new highly levered names over the last couple of years, prior to recent oil price plunge.
'The economics of shale are changing,' says Eric Rosenthal, Senior Director of Leveraged Finance. 'Without a clear trajectory for oil supplies and prices amid varying company liquidity profiles, the energy default rate through the end of this year remains uncertain. However, it is more likely that we will see a more broad-based acceleration of the energy default rate in 2016-2017.'
A study of 74 high yield energy companies in Fitch's portfolio shows that the sector's financials weakened. Fourth quarter 2014 (4Q'14) leverage increased to 3.7x from 3.4x in the third quarter while interest coverage shrunk to 5.1x from 5.4x. Fitch expects further weakening for much of the year, at least until the anniversary of the oil price decline. At the same time, Fitch believes energy companies will take steps to preserve liquidity and attempt to minimize cash drain. In the fourth quarter, energy companies reduced capital expenditure by 9% sequentially and 3% year-over-year while cash balances fell 29% from 3Q'14 and 23% from 4Q'13.
Across all sectors, the TTM high yield default rate remained at 3.4% at end-February, unchanged from the month prior. Removing Energy Future Holdings and Caesars Entertainment Operating Co., the default rate drops to 1.3%.
