Thursday, February 25, 2016

Oil: Here Come the Defaults

From Bloomberg: 

Biggest Wave Yet of U.S. Oil Defaults Looms as Bust Intensifies
In less than a month, the U.S. oil bust could claim two of its biggest victims yet.
Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy.

If the two companies fail in March, it would be the biggest cluster of oil and gas defaults in a month since energy prices plunged in early 2015.

“We’re just beginning to see how bad 2016 is going to be,” said Becky Roof, managing director for turnaround and restructuring with consulting firm AlixPartners.

Debt-Fueled Boom
The U.S. shale boom was fueled by junk debt. Companies spent more on drilling than they earned selling oil and gas, plugging the difference with other peoples’ money. Drillers piled up a staggering $237 billion of borrowings at the end of September, according to data compiled on the 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. U.S. crude production soared to its highest in more than three decades.

Oil prices have now fallen more than 70 percent from a 2014 peak, and banks and bondholders are fighting for scraps. Bond prices reflect investors’ fears. U.S. high yield energy debt lost 24 percent last year, the biggest fall since 2008, according to Bank of America Merrill Lynch U.S. High Yield Indexes. Investors are now demanding a yield of 19.6 percent to hold U.S. junk-rated energy bonds, after borrowing costs for these companies exceeded 20 percent for the first time ever this month, according to data compiled by Bank of America Merrill Lynch.

Both Energy XXI and SandRidge could still reach an agreement with creditors that will give them time to turn their businesses around. SandRidge said last week that it missed a $21.7 million interest payment. The company owes $4.2 billion, including a fully-drawn $500 million credit line. Energy XXI, which owes $3.4 billion, said in a filing last week that it missed an $8.8 million interest payment.

David Kimmel, a spokesman for SandRidge, said it has the money to make interest payments due in February, March and April. He wouldn’t comment on SandRidge’s options if it doesn’t make the interest payments by the end of the grace period. David Griffith, investor relations associate with Energy XXI, did not respond to an e-mail seeking comment.

Now What?
The companies’ failing to pay interest on their bonds may be a way to help motivate creditors to renegotiate debt, said Jason Wangler, an energy analyst with Wunderlich Securities in Houston.
“It’s a negotiating tool,” Wangler said. “They say, ‘I’m not going to pay you. Now what are you going to do?’”...MORE
I know, I know!
I think the answer is:
"We're going to take away all the assets, shop for a prosecutor to charge you criminally and sue you civilly for common, wire and securities fraud".
"Then we'll see if we can pierce the corporate veil to go after you personally."
"After the foreplay, we're going to..."
Is that the correct answer?