It seems there is no end to the oil industry’s woes. The number of defaults is mounting for the beleaguered sector and the latest victim of this trend is Samson Resources Corp. Last Wednesday, it filed for chapter 11 bankruptcy, which will erase a substantial amount for its investors.

Several others are lined up for a similar fate. Moody’s has rated nearly 25% of oil and gas producers at B3 or lower, which emphasizes their junk status. However, other sector players are better placed and have taken appropriate measures to deal with the situation. This is why it may be a good idea to pick stocks from this sector which have low debt capital ratios.

Default Crisis Intensifies

The seriousness of the situation has recently been illustrated by Fitch Ratings. According to the agency, the industrywide rate of default has increased from 3.3% in August to 4.8%. This is the highest rate witnessed since 1999, an outcome of the oil price plunge. 

Expectedly, the exploration and production subsector is the worst placed among the industry, with a default rate of 8.5%. These companies have a default volume of $10.4 billion, a five-year high. Producers had managed to survive the price plunge because investors had continued to push money into these companies. However, now lenders have decided otherwise and they are running out of cash at a worrying rate.

In August, Hercules Offshore Inc. (HERO – Snapshot Report) filed for bankruptcy in order to carry out its debt for equity swap. According to Fitch, it is one of six companies, along with Samson, which have defaulted over the last six weeks.

October may witness several more defaults as banks lower their credit levels for such companies. This is an outcome of the sectoral regulator telling banks that several loans issued to producers are worrying.

Bonds Underline Industry Situation

Energy bonds with junk ratings have been mirroring the industry’s crisis. According to Barclays PLC (BCS – Analyst Report), the yield on a bunch of such U.S. bonds has increased to 11% from the year-ago figure of 5.9%. This means prices are sliding and so is investors’ belief in the sector’s debt securities.