Crude Collapse Has Investors Braced for ’80s-Like Oil Casualties
By Rebecca Penty and Zain Shauk Jan 21, 2015 12:01 AM ET
When a glut of crude flooded the market in the 1980s, scores of energy companies disappeared through almost five years of depressed prices. Investors are worried history is repeating itself.
The supply overhang led to a 66 percent slide in prices over four months, starting in November 1985. Bankruptcies and mergers reduced the number of U.S. producers by 54 percent before a price rebound took hold in 1990.
While the rout of the past seven months hasn’t yet led to the carnage of three decades ago, there are ominous signs. North American producers are cutting spending, staff and dividends to stay afloat amid forecasts for U.S. crude below $40 a barrel. Investors are fleeing those most at risk. Vulnerable companies are already defaulting on debt or seeking protection from creditors.
“As bad as it feels today, it can be worse,” said Timothy Parker, a Baltimore-based fund manager at T. Rowe Price Group Inc., which sold stakes in two debt-laden shale operators. “What pain have you seen in two months? Not much.”
Banks will probably push high-debt companies to sell assets and restructure in the coming months, said Chad Mabry, an analyst at MLV & Co LLC in Houston. If prices stay low into September, defaults will probably rise, he said.
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