With 59 oil and gas companies now bankrupt after this week’s filings for creditor protection by Midstates Petroleum and Ultra Petroleum, the rout in crude prices is snowballing into one of the biggest avalanches in the history of corporate America.

According to Reuters data, the law firm Haynes & Boone and bankruptcydata.com, the number of U.S. energy bankruptcies is closing in on the staggering 68 filings seen during the depths of the telecom bust of 2002 and 2003.

The U.S. oil industry is not even halfway through its wave of bankruptcies, said Charles Gibbs, a restructuring partner at Akin Gump in Texas.

“I think we’ll see more filings in the second quarter than in the first quarter,” he said. Fifteen oil and gas companies filed for bankruptcy in the first quarter. Hoping the price of crude stabilizes at a higher level some oil producers appear to be holding on. From peaks above $100 a barrel nearly two years ago oil slumped as low as $27 a barrel in February. U.S. crude has recovered somewhat and has been trading a little below $44 a barrel.

Lately some lenders have tightened their purse strings, while until recently, banks had been willing to offer leeway to borrowers in the shale sector.

As oil price volatility makes valuations difficult, and buyers balk at taking on debt loads until target companies exit bankruptcy, a widely predicted wave of mergers in the shale space has yet to materialize.

The telecom and energy boom-and-bust cycles have notable parallels. A plethora of new, small companies issued high levels of debt pioneering technology brought an influx of investment to each industry. Each of the industries was faced with a subsequent supply glut sapped pricing just as demand fell sharply.

However in terms of magnitude and economic impact, neither this crash nor the telecom crack-up in the early 2000s rivals the housing and financial bust in 2007-2009. But there have been significant losses for the energy investors in the stock and bond markets in the last two years. It remains unclear who will be left standing when it is over and how long it will take to get through the worst of the declines.

According to the Dow Jones U.S. Oil and Gas Index .DJUSEN, which tracks about 80 stocks, a 60 percent slide in oil prices since mid-2014 erased as much as $1.02 trillion from the valuations of U.S. energy companies. The $882.5 billion peak-to-trough loss in market capitalization from the Dow Jones U.S. Telecommunications Sector Index in the early 2000s has been already surpassed by this. There are also signs that lots of money could be lost this time around, especially in high-yield bonds in the debt market.

Twice as much in bonds as telecom companies had issued in the latter part of the 1990s through the early 2000s, were issued by the U.S. oil and gas companies during its boom.

About $177.1 billion in new bonds were sold in the U.S. telecommunications sector between 1998 and 2002. Of this less than 10 percent were junk bonds. With junk bonds making up more than 50 percent of all issuance, U.S. oil and gas companies sold about $350.7 billion in debt between 2010 and 2014.

(Adapted from Reuters)

Categories: Economy & Finance