Time for a “frac holiday“. That’s what people in the oil business unironically call sending drilling crews home, as Reuters informs us in a broader article about trouble at Oasis Petroleum on April 28, 2020. The E&P company has decided to stop all drilling in the Bakken. As you’ll have undoubtedly heard, U.S. oil producers are closing down production due to very low prices and Oasis is joining in. That’s obviously not good for the company’s finances and the servicing of its $2.7bn debt load. To add insult to injury – but not unexpectedly – Moody’s has downgraded the debt, and the outlook, of the company as well.
This is not good news for the only BDC with exposure – FS Energy & Power – which holds $13.0mn in subordinated notes – according to Advantage Data quoting 12/31/2019 records -which was valued close to par. Now that same debt is trading at a (90%) or so discount. We are leapfrogging the company’s credit rating from CCR 2, which is performing, to CCR 4, which means we believe the likelihood of ultimate loss is greater than that of recovery. Oasis is also being added to our Weakest Links list as a default seems imminent. Given that the BDc’s debt is junior in the balance sheet, we currently expect a complete write-off of the position, but we’ve more homework to do to confirm as much. About $0.900mn of investment income would be lost.