The bankruptcy wave that’s been washing through the U.S. oil and gas industry is far from over, according to a fresh report by debt specialists at Debtwire. But there is some good news, as well, for a change: the speed of this wave is slowing down, which means the number of companies troubled deeply enough to file for bankruptcy protection is on the wane.

Debtwire estimates that at least 135 E&Ps are at a high risk of going under. The list includes Comstock Resources with a debt load of $1.2 billion, W&T Offshore with debts of $1.4 billion, EXCO Resources, which owes its creditors $1.2 billion, and Chesapeake Energy with $14 billion outstanding.

This, however, is a decline on Debtwire’s January list of companies at risk, when there were 180 E&Ps on it.

On the one hand, this could be seen as good news, interpreted as a sign of the improving environment in oil and gas thanks to the price rebound from the February trough of under $30 a barrel. In support of this interpretation, Bloomberg reported in late August that M&A activity in the sector had started to improve, with deals worth $11 billion in total announced in July alone.

On the other hand, however, the reason that bankruptcies in U.S. oil and gas are slowing down could be the simple fact that there is a finite number of companies that can go bankrupt, and most of them already have or are about to.

In February, we wrote about a Deloitte report that warned bankruptcies in U.S. oil and gas could this year exceed the levels seen during the Great Recession. The total debt of U.S. and Canadian energy companies at end-2015 was calculated by Alix Partners at $353 billion. Things haven’t improved that much since then, despite the price rebound and the increase in drilling rigs taken by many as a cause for optimism, despite the fact that virtually every added rig immediately weighs on oil futures prices. Related: Geopolitical Oil Glut: What Happens When Libya Exports 600,000 bpd in 4 Weeks?

E&Ps are still in deep trouble, and they are not the only ones: so are their lenders. According to Moody’s, investor losses from defaulting companies since 2015 have been the greatest among all oil industry downturns so far. The rating agency has estimated, based on an analysis of 15 company defaults, that creditors only got an average of 21% of the face value of what they’d lent to the companies. This compares with a historical average of 58.6% for all previous downturns.

Between January 2015 and July 2016, as many as 90 E&Ps went under, with their combined debt calculated at $66.5 billion, according to Haynes and Boone. That makes an average of about $740 million in debt per company. This is debt that the companies that sank could not repay. Now, some of the ones at risk owe more than a billion and oil prices seem to be stuck around the $50 mark with no prospects to continue climbing towards $60. It’s a pretty safe bet that there will be more bankruptcies, but also possibly major changes in ownership.

Distressed corporate debt attracts a certain type of investor like nothing else. Investors who deal in private equity and who know that sooner or later, the oil industry will recover simply because at some point the glut will be over for sure. So, this type of investor is spending generously on the distressed debt of E&Ps, with the latter short of many options but to sell the debt to any buyer that happens to be around, and at any price they offer. The situation we’re seeing right now in oil and gas is basically “sell or die”, a veritable classic Western plot.

By Irina Slav for Oilprice.com

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