The default rate for struggling energy exploration companies is expected to more than double in the coming year as oil prices remain volatile, Moody’s Investors Service reports.
The rating agency says that its forecasting model is now calling for the 12-month default rate for companies that are already rated B2 or below in the exploration and production (E&P) sector to increase from 2.7% to 7.4%.
“With a gradual recovery in energy prices, the weaker oil & gas issuers are at a much greater risk of default,” said Moody’s senior vice president, David Keisman. “The companies on the lower end of spec-grade ratings are the ones that should be most worried.”
Moody’s says that, as of May 1, the oil and gas sector accounted for 15% of companies rated B3 or lower. For comparison, a year ago, the sector made up just 8% of companies with those rating levels.
“The oil and gas industry is characterized by boom and bust cycles, and many U.S. E&P companies with experienced management teams have seen this game before,” noted Moody’s senior vice president, Pete Speer. “While these companies have successfully navigated the waters thus far, low oil prices will continue to pressure the industry-at-large and these companies’ credit metrics.”