Despite a raft of bond refinancings and spending cuts, many oil and natural gas companies will not survive the wall of debt coming due in the next three years, S&P Global Ratings said Oct. 15.

"A Saudi-Russia price war combined with the unprecedented demand destruction stemming from COVID-19 have reduced crude prices to levels we have not seen in many years," Ratings credit analyst Paul Harvey said. "Although prices have since improved, the O&G debt wall looks insurmountable for many issuers as their 2021-2023 maturities approach and the conditions in the capital markets remain choppy."

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Refinancing and bankruptcies have already reduced the size of the wall. Through 2022, Ratings expects about $52 billion of the sector's debt will mature — a 55% drop from its original face value.

But the window is closing for most oil and gas companies to refinance, particularly those with lower credit ratings, leaving Chapter 11 as the only option, Ratings said. This year's bankruptcy filings by big producers such as Chesapeake Energy Corp. and California Resources Corp. "are just the latest signs of the hard times to come."

By the end of the third quarter, the oil and gas sector had the highest negative bias, Ratings said in an Oct. 14 review of third-quarter corporate debt, with the rating agency having a negative outlook on 69% of oil and gas borrowers. Assuming average crude oil prices of $35 per barrel this year and $45/b in 2021, prices are below Ratings' $50/b break-even price for U.S. shale producers, the rating agency said.

"As prices remain below break-even, weaker-rated companies, particularly those with large exposure to oil, remain vulnerable to negative rating actions," Ratings said. "More than two-fifths of all rated companies in the sector are rated 'B-' or lower, and more distressed exchanges and bankruptcies are likely over the next year."

Ratings expects that, with the credit window closing, selective defaults and bankruptcies will rise in the sector, with Chapter 11 filings more likely as investors are increasingly unwilling to trade old debt for new debt, despite favorable terms. "Investor appetite for exchanges appears to have waned given that many of the proposed transactions over the past six months have been unsuccessful," Ratings said. "This suggests that investors are shying away from the sector given the commodity price volatility, uncertain returns, and higher risk."

This unwillingness to invest on oil and gas debt comes despite the higher yields offered, Ratings said, citing the industry's track record of low returns, volatility and shifts by lenders to industries that better match environmental, social and governance goals.

"A shrinking investor pool and higher yields do not bode well for the future refinancing of much of the industry's speculative-grade debt," Ratings said.

This S&P Global Market Intelligence news article contains information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.