Falling Oil

High-yield, high-risk debt is rated less than Baa3 by Moody’s Investors Service and under BBB- at Standard & Poor’s.

West Texas Intermediate crude dropped from a June high of $107.26, falling 17.9 percent in November after the Organization of the Petroleum Exporting Countries decided last week to keep its production target of 30 million barrels a day.

Output in the U.S. will climb to 9.5 million barrels a day next year, the most since 1970, the Energy Information Administration estimated Oct 7. Demand nationwide will slip this year to the lowest since 2012, the government predicted.

Lower oil prices will “affect cash flow but also capital spending, which in turn, affect projected production and cash flow in a downward spiral,” Gary Stromberg and Jan Trnka- Amrhein, analysts at Barclays Plc, wrote in a note to clients dated yesterday.

Borrowing Limits

Because the amount oil and gas companies are permitted to borrow from bank lenders is directly tied to the value of their reserves, falling commodity prices increase the risk they will face a cash squeeze, according to an Oct. 9 report by Spencer Cutter, an analyst at Bloomberg Intelligence in Skillman, New Jersey.

The extra yield investors demand to hold the bonds of energy companies instead of comparable U.S. Treasuries increased to 7.63 percentage points yesterday, more than double the premium in June, Bloomberg data show. The price of crude collapsed 35.7 percent during that period.

The issuance of debt has helped contribute to production growth in the U.S. and falling prices will make it harder for companies to meet their obligations, according to Virendra Chauhan, a London-based oil analyst with Energy Aspects Ltd.

“My sense is we’re just on the cusp of bad news there and we’ll see things get worse before they get better,” David Kurtz, global head of restructuring at Lazard Ltd., said at Beard Group Inc.’s Distressed Investing conference in New York yesterday.
 

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