Junk Bonds and Fracking at Low Oil & Gas Prices: Wave of Defaults, “Outright Liquidations” Next

Monday, January 26, 2015
By Paul Martin

by Wolf Richter
WolfStreet.com
January 25, 2015

Next Chapter in the Great American Oil Bust

Every rally in crude oil since June turned out to be a pathetic sucker rally. On Friday, West Texas Intermediate fell over 2% to $45.32 a barrel, back where it had been on January 12, annihilating most of the 12% rally in between. WTI is now 58% below the June peak.

“If prices stay low well into the latter half of this year and next year, borrowing basis will come down quite significantly” for oil-and-gas exploration-and-production companies in the US, “and that is when you can start to see liquidity spiraling out,” warned Tom Watters, a managing director at Standard & Poor’s oil & gas team. And that, he said, is when single-B rated companies could see a wave of defaults.

These “junk” debt issuers that rode up the fracking boom with borrowed money are among the higher cost producers globally. They would be hit first by the declining prices, Watters said according to LCD HY Weekly. Their revenues are collapsing, but they’ve loaded up on debt that is now strangling them. They’re responding with layoffs, and they’re cutting operating costs and capital expenditures, and they’re shuttering facilities.

But some of these players might not be able to hang in there much longer. On January 15, Canada’s GASFRAC, filed for bankruptcy in Calgary, Alberta, where the company is based, and in San Antonio, Texas, where it filed under Chapter 15 for cross-border bankruptcies.

The company prides itself in its patented technology that allows producers to frack a well without water, the scarcity of which being a big issue in Texas, California, and other parched states. Instead, it uses liquid propane gel (LPG), which is similar to Napalm. “As the injected LPG blends with reservoir hydrocarbons and flows back with the production stream, 90 – 100% can be recaptured by the operator,” its website claims.

The Rest…HERE

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