Assessment of Oil & Gas Bankruptcy Cuts in Half Despite the Strings of Bankruptcy


As per S&P Global Market Intelligence’s market signal of metric, the stock market investor’s market estimate of default risk in the oil & gas segment fell into the half despite the series of bankruptcies in the second quarter. One could witness the spike in the probability of default metric in March and April after oil prices have sunk to record lows as the COVID19 outbreak lessened the demand.

The probability of default metric conglomerates the presentation of the stock market and finance rudiments and its operation under the inference that investors hesitate to invest money in failing firms. The massive 77% drop in the market signal metric took place in the second quarter in the probability of default score for oil-field service industries.

Considering the various factors, S&P Global Market Intelligence marked the oil-field service sector as unsafe in April. However, this segment resumed to the center of the pack by the quarter-end. Both the production and the exploration firms came back to their accustomed position as the unsafe oil and gas ventures by the quarter-end, nonetheless their risk metric fallen by more than half.

Analysts at S&P Global rating shares, “In North America, we expect a high number of defaults to continue as access to capital markets for lower-rated speculative-grade issuers remains limited, and liquidity shrinks due to cuts to the borrowing bases of revolving credit facilities.”

The probability-of-default model, or shortly known as the PD model, is developed by the Credit Analytics branch of S&P Global Market Intelligence. It is a structural model that calculates a median one-year market signal probability of default for over 64,000 public industries across the globe. It denotes the odds that a firm will default on its debt in the next year, dependent on fluctuations in its share price and other industry or country-related risks.

The drastic variations in this probability of default measures were compared to the adverse viewpoints from foremost credit rating agencies. They expected oil & gas defaults to endure through the rest of 2020.

On July 31, Moody’s says, “The oil and gas patch was responsible for 30% of the quarter’s defaults in Q2 — nine bankruptcies, six distressed exchanges, and a missed interest payment. Similar to the default trends observed during the 2015-2016 commodity crisis, once again, the speculative-grade oil and gas sector drove defaults higher and will continue to do so through April 2021.”

Similarly, Fitch Ratings said on July 13 that “Chesapeake Energy Corp.’s bankruptcy lifted the sector default rate to 13.2% at the end of June, a level last reached in April 2017. We anticipate the energy rate to hit 15% by July end and remain elevated to end 2020 at 17%.”

Besides all this, the tourism industry has also been effectively suspended by mass lockdowns and travel restrictions due to coronavirus. It is another industry that has dominated the list of worst-hit sectors. But with the policymakers stepping up support, it has witnessed ease in the median market signal for the probability of defaults.

At the other end, the real estate and the number of insurance trusts are now the safest sectors as per the PD Model.