In the oil and gas industry, there is a storm brewing between holders of second lien debt and unsecured high yield bonds. These creditor groups are finding themselves pitted against one another as oil and gas companies become increasingly leveraged in an effort to alleviate liquidity constraints.
As widely publicized, oil prices precipitously decreased in 2014 and depressed prices have continued into 2015, with prices falling from $103 per barrel a year ago to around $60 per barrel today. With this prolonged decline and period of weak oil prices, oil and gas companies are having difficulty breaking even. Therefore, it is not surprising that many industry players, particularly the upstream division (comprised of exploration and production activities), have experienced tightened liquidity. Larger and well-diversified companies are best equipped to weather the storm because they are able to rationalize liquidity by suspending new projects and future exploration, selling non-core/non-producing assets and demanding price reductions from service providers. While these measures have helped ease some financial stress, they are often not enough and companies have turned to the debt capital markets as a source of liquidity. These new financings provide companies with much needed time to either wait out this period of depressed oil prices or formulate a restructuring plan.