Here is an indicator that we’re facing the prospect of a stock market crash this year. The recent blip of oil prices may not be high or fast enough to protect all oil and gas producers from bond defaults or bankruptcy.
Earlier this week, Linn Energy LLC (NASDAQ:LINE), the oil and natural gas company based in Houston, Texas, was one step from filing for chapter 11 bankruptcy.
It said that bankruptcy may be unavoidable as the oil and gas producer missed interest payments amid a slump in oil prices. (Source: “Linn Energy says bankruptcy may be ‘unavoidable’,” Reuters, March 15, 2016.)
If Linn files for bankruptcy protection, its $10.0 billion in debt would make it the largest U.S. oil company to do so since oil prices began their sharp decline in mid-2014.
Linn was designed as a high-yield energy investment vehicle, which received beneficial tax treatment in return for paying out the bulk of its profits as distributions to its unitholders.
Because of this structure, the company took on significant debt to grow through acquisitions. Since 2006, the company has done 62 deals for a total of around $17.0 billion to build its asset base. (Source: Ibid.)
LINE stock has been crushed. It is currently trading at $0.73 a share, down from a peak of $32.30 in June 2014.
Linn’s peers, including Breitburn Energy Partners LP (NASDAQ:BBEP), Vanguard Natural Resources, LLC (NASDAQ:VNR), and Memorial Production Partners LP (NASDAQ:MEMP), are facing similar or slightly better conditions. (Source: “Linn Energy LLC Stock Falls Following Missed Interest Payments,” BFN, March 16, 2016.)
In all, about 40 oil and gas producers had filed for bankruptcy protection globally since 2014, according to a February report from Deloitte. It’s an alarming figure that raises concerns about an imminent stock market crash.
Crude traded to 13-year lows, hitting $26.00 a barrel in January, before its recent rebound to touch $40.00 a barrel for the first time this year.
Energy consulting firm Rystad Energy says smaller players typically need a minimum $50.00-per-barrel oil price to make a profit.
Last week, Fitch raised its 2016 forecast for U.S. high-yield bond defaults from 4.5% to six percent and said it expects energy and materials issuers to default on $70.0 billion of debt this year, including $40.0 billion for energy alone.
The new rate of default is the highest that Fitch has ever forecast during a non-recessionary period, beating the 5.1% it forecast for 2000. (Source: “Fitch expects $70 billion of defaults by energy and materials companies this year,” MarketWatch, March 10, 2016.)
One more sign that a U.S. stock market crash might be coming this year: Moody’s Investors Service said earlier this month that it expects the default rate for all corporate issuers rated by the agency to rise more than 30% in 2016 to its highest rate since the 2008/09 crisis.
Moody’s is expecting the rate to climb from 1.7% in 2015 to 2.1%. That implies 138 defaults this year, which would be almost a third more than in 2015. (Source: “Corporate defaults expected to rise 30% in 2016, says Moody’s,” MarketWatch, March 1, 2016.)