A March Wall Street Journal headline read “U.S. Coal Sector Faces Reckoning.” The story was about the likely debt restructuring or bankruptcy of Peabody Coal, once a stalwart of the U.S. coal producers. The headline could just as well have read, “U.S. Energy Sectors Face Reckoning.”

U.S. production of oil and natural gas represents an important market for the brownwater barge and Gulf of Mexico bluewater offshore industries. The oil and gas sectors are in a deep financial slide from overdevelopment and overproduction accompanied by substantial debt. Just as with the free fall of domestic coal prices, about 60% since 2011, there has been a steep decline in oil and natural gas prices.

This has potentially exposed creditors to very large losses. The extent of the losses in the oil and gas sector varies by geography and well productivity, causing huge variations in corporate valuations. Bonds of domestic oil producers currently trade at premiums (value higher than face value) to very large discounts, as low as one cent on the dollar.

In general the best performing oil and gas companies with junk bond ratings (bonds trading at a discount to face value) are in west Texas, Canada and parts of Oklahoma. The bonds of these companies are trading on average of about 80% of face value. Most other oil and gas junk bonds from other production regions are faring much worse, including offshore at about 25% of face value.

Implications for the offshore sector appear to be particularly grim. Current bond discounts indicate that there will not be much new investment offshore.

While produc-tion will remain high because of committed investments, expect a holding pattern for major deepwater exploration until prices return to historical levels. The spillover effects on commercial marine-related companies ranging from barge operators to shipyards will be felt for some time. Like coal, the oil and gas sector will have to work off the debt through write-downs, restructurings, and bankruptcies, until sustained higher prices make new investment attractive. The light at the end of this debt depression tunnel will be a train for many of these companies.


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