When a glut of crude flooded the market in the 1980s, scores of energy companies disappeared through almost five years of depressed prices. Investors are worried history is repeating itself.
As Bloomberg reports, the supply overhang in the 1980s led to a 66% slide in prices over four months, starting in November 1985. Bankruptcies and mergers reduced the number of U.S. producers by 54% before a price rebound took hold in 1990.
While the rout of the past seven months hasn’t yet led to the carnage of three decades ago, there are ominous signs. North American producers are cutting spending, staff and dividends to stay afloat amid forecasts for U.S. crude below $40 a barrel. Investors are fleeing those most at risk. Vulnerable companies are already defaulting on debt or seeking protection from creditors.
“As bad as it feels today, it can be worse,” says Timothy Parker, a Baltimore-based fund manager at T. Rowe Price Group Inc., which sold stakes in two debt-laden shale operators. “What pain have you seen in two months? Not much.”
Banks will probably push high-debt companies to sell assets and restructure in the coming months, says Chad Mabry, an analyst at MLV & Co. in Houston. If prices stay low into September, defaults will probably rise, he predicts.
UBS AG forecasted last month that default rates by high-yield energy companies may rise to 10% as they fail to service some of the $200 billion of bonds outstanding from a borrowing spree that fueled the shale boom. Lenders are already being tested. Read the full story.
