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New U.S. Oil Boom Near: Defaults Are On The Rise

More U.S. oil companies could soon join Samson Resources and Hercules Offshore in filing for bankruptcy protection as banks are expected to tighten credit amid an oil price slump that looks to keep dragging on.

The bulk of the cash flow at oil producers is already devoted to servicing debt, which expanded earlier this year when companies turned to the bond and equity markets to offset lower revenue from selling cheaper oil.

The Energy Information Administration said Friday that 83% of the operating cash at U.S. companies with onshore activity was devoted to debt repayments from July 1, 2014 to June 30, 2015, marking the highest rate since at least 2012.

"Low oil prices have significantly reduced cash flow for U.S. oil producers, and to adjust to lower cash flows, companies have reduced capital expenditures and raised more cash from debt and equity," the EIA report said. "With fixed debt repayments and the large reduction in cash from operations for these companies, the ratio of debt repayments to operating cash flow has increased recently.

The number of missed debt payments is already piling up. The past six weeks have seen six energy defaults, including distressed debt exchanges for SandRidge Energy (SD) and Halcon Resources, Fitch Ratings said Thursday.

In the last 12 months, the default volume in the oil production sector was $10.4 billion — more than the annual amount in each of the past five years.

Samson's bankruptcy filing this past week pushed the default rate for exploration and production companies in the trailing 12-month period to 8.5%, the ratings agency added, well above the overall corporate default rate of 2.9%.

"Samson Resources is the latest in the parade of leveraged exploration and production (E&P) companies unable to overcome challenges from the weak natural gas and oil pricing without restructuring," Fitch said in a statement.

More carnage may be on the way. In October, banks are expected to cut the amount of credit they give to U.S. oil and gas firms. Credit lines in the industry are often backed by the value of borrowers' oil and gas assets.

But those assets drop in value as oil prices fall. On Friday, U.S. crude futures sank 4.7% to $44.68 a barrel, and Brent crude fell 3.3% to $47.47.

Companies will still struggle even if oil climbs back up to $50 a barrel. Continental Resources (CLR) CEO Harold Hamm has said that if U.S. crude prices are at $60 a barrel, cash flow would be neutral. But below $50, the bellwether shale producer would be outspending its cash inflow.

Goldman Sachs (GS) analysts recently warned that in a worst-case scenario, Brent could hit $20 a barrel, as the oil glut is worse than previously estimated.

The prospect of less financing from banks comes as energy companies rely less on the bond and equity markets to raise liquidity.

According to a Dealogic report earlier this year, E&P firms sold $10 billion in shares in Q1, but only $3.7 billion in Q2, and a further drop is seen for Q3.

The bond market is drying up too. E&P firms sold an average of $6.5 billion in bonds each month during the first half of 2015, but only $1.7 billion in July and August.

Meanwhile, production companies have been slashing capital spending and costs. They have demanded lower prices from oilfield service companies like Halliburton (HAL) and Schlumberger (SLB) while also trying new cost-saving techniques like using different grades of sand proppants, drilling with rigs that can easily be moved on tracks, and decreasing the space between wells.

Payouts to shareholders are also getting the ax. In July, Linn Energy (LINE) and its affiliate LinnCo. (LNCO) said they would stop making dividend-like payments to shareholders to free up money for debt payments.

The number of oil rigs in operation have also started to come back down, after a brief rebound that tracked a temporary bump in oil prices over the spring.

On Friday, Baker Hughes (BHI) said the U.S. oil rig count fell by 8 in the latest week to 644, the third straight decline, and is down by 957 rigs vs. a year ago.

Follow Gillian Rich on Twitter @IBD_GRich.