U.S. oil companies are further strained as prices collapse

Collectively, energy companies in S&P 500 are down roughly 60% this year.

Matt Phillips, Clifford Krauss

Wall Street supercharged America’s energy boom of the past decade by making it easy for oil companies to finance growth with cheap, borrowed money. Now, that partnership is in tatters as the coronavirus pandemic has driven the fastest collapse of oil prices in more than a generation.

The energy sector has buckled in recent weeks as the global demand for oil suddenly shriveled and oil prices plunged, setting off a price war between Saudi Arabia and Russia. Oil prices are now one-third their most recent high, trading as low as $24 a barrel, and could fall further.

The crisis has been a body blow to the U.S. oil and gas industry. Already heavily indebted, many companies are now struggling to make interest payments on the debt they carry and are finding it challenging to raise new financing, which has gotten more expensive as traditional buyers of debt have vanished and risks to the oil industry have grown. Companies are increasingly turning to restructuring advisers to work through their finances, and the weaker businesses could end up filing for bankruptcy.

Collectively, the energy companies in the S&P 500 stock index are down roughly 60% this year. Prices of bonds issued by U.S. energy companies — both the safer investment-grade kind and riskier junk bonds — have plummeted, while their yields have skyrocketed.

Even once-unassailable energy giants appear fragile.

On Monday, S&P Global Ratings cut the oil behemoth Exxon Mobil’s credit rating, citing the impact of lower oil prices on cash flows, and some analysts are questioning whether it will be able to keep paying its current dividend. A week after Occidental Petroleum slashed its dividend, Moody’s Investors Service downgraded its rating of the company. Occidental is stretched by its acquisition of Anadarko last year, which required it to take on $40 billion in debt, and is now expected to make severe payroll cuts.

“The shale players were already stretched to their limits, and the virus has just broken every thread they were holding on by,” said Ed Hirs, an energy economics lecturer at the University of Houston.

The American shale revolution began around 2008 as oil prices flirted with $150 a barrel and when the U.S. faced chronic shortages of energy and dependence on Saudi Arabia and unstable producers like Venezuela and Nigeria. In the decade that followed, investors — and the Wall Street bankers who catered to them — were more than happy to provide financing for upstarts like Oklahoma-based Chesapeake Energy and Devon Energy.

Interest rates were low, and investors embraced the riskier debt that energy companies typically issued with the promise of higher returns. In the last 18 years, energy companies were among the largest issuers of junk bonds on Wall Street, according to analysis from JPMorgan Chase. In 10 of the last 11 years, energy companies were the single largest junk bond borrowers.

TAMIR KALIFA / NEW YORK TIMES Oil is transferred from tanks to a truck at a Parsley Energy facility east of Midland, Texas, last year. Energy companies were major issuers of junk bonds to finance expansion but now are in trouble as capital has dried up and oil prices have cratered.