Energy industry analyst says one-third of fracking companies in danger of going bust by end of year

Months of low activity could lead as many as one-third of oil and gas companies that involve hydraulic fracturing to go bust by the end of the year, according to James West, an energy industry analyst at ISI Evercore, Stephen Gandel reports for Fortune. "So far oil and gas exploration companies, while cutting back somewhat, have continued to spend based on budgets set a year ago when oil prices were much higher. But now West says the price of oil is catching up to them, and they may soon have to drastically cut back their spending on services. The catalyst is the banks."

"Banks lend to oil exploration companies based on the value of their reserves," Gandel writes. "But they only audit the value of those reserves every October. Given how much oil prices have tumbled in the past year, many analysts expect banks to greatly reduce in the next month how much they are willing to lend to oil and gas companies. Regulators, worried banks may face losses, have recently been pressuring banks to cut back their lending to oil and gas companies."

Credit ratings firm Standard & Poors reported on Friday that the oil and gas industry has the largest amount of distressed borrowers, accounting for 95 out of 270 of those companies, Gandel writes. The distressed ratio, "which measures the percentage of corporate borrowers that investors appear nervous may not be able to pay back their debt, had reached the highest level since 2011." While most of the distressed oil and gas companies are small, "problems are starting to affect some of the bigger companies in the industry."