That borrowing binge meant that by 2014, almost all investors in junk bonds were heavily exposed to the fate of these companies. Since 2016, when oil prices began to drop, 208 North American producers have filed for bankruptcy involving $121.7 billion in aggregate debt, according to the Haynes and Boone’s Oil Patch Bankruptcy Monitor report released in late January. That means many investors in those bonds lost their principal. But debt offered by the companies that did survive the bust still accounts for more than 10 percent of the junk bond market.
“The main technology innovation there was financial innovation,” said Roman Rjanikov, a portfolio manager at DDJ Capital Management in Waltham, Mass. “Somehow they were able to convince investors that never generating cash was cool.”
The problem with that model, he said, is that “when you lose access to that capital, things break down.”
Oil companies were already under pressure from lower oil and natural gas prices because of a warm winter even before the coronavirus outbreak and the price war between Saudi Arabia and Russia. Also, margins for refining and chemical production have been shrinking. And with analysts at Citi projecting that the global Brent oil benchmark price will go as low as $17 a barrel, things could get much worse.
In recent days, oil companies have cut their capital spending sharply. In Texas, the epicenter of the shale drilling boom, companies have axed at least $8 billion in the last few days from their 2020 capital budgets, pulling drilling rigs and canceling hydraulic fracturing crews. The job losses that follow will likely be significant, worsening what’s expected to be a deep recession in the United States.