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Junk Bond Oil Slick

Posted on January 27, 2015

By Wolf Richter

Every rally in crude oil since June turned out to be a pathetic sucker rally. On Friday, West Texas Intermediate fell over 2% to $45.32 a barrel, back where it had been on January 12, annihilating most of the 12% rally in between. WTI is now 58% below the June peak.

“If prices stay low well into the latter half of this year and next year, borrowing basis will come down quite significantly” for oil-and-gas exploration-and-production companies in the US, “and that is when you can start to see liquidity spiraling out,” warned Tom Watters, a managing director at Standard & Poor’s oil & gas team. And that, he said, is when single-B rated companies could see a wave of defaults.

These “junk” debt issuers that rode up the fracking boom with borrowed money are among the higher cost producers globally. They would be hit first by the declining prices, Watters said according to LCD HY Weekly. Their revenues are collapsing, but they’ve loaded up on debt that is now strangling them. They’re responding with layoffs, and they’re cutting operating costs and capital expenditures, and they’re shuttering facilities.

But some of these players might not be able to hang in there much longer. On January 15, Canada’s GASFRAC, filed for bankruptcy in Calgary, Alberta, where the company is based, and in San Antonio, Texas, where it filed under Chapter 15 for cross-border bankruptcies.

(For the rest of the story, click the link.)

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