Oil in­dus­try needs half a tril­lion dol­lars to en­dure price slump

The Pak Banker - - BUSINESS -

At a time when the oil price is lan­guish­ing at its low­est level in six years, pro­duc­ers need to find half a tril­lion dol­lars to re­pay debt. Some might not make it.

The num­ber of oil and gas com­pany bonds with yields of 10 per­cent or more, a sign of dis­tress, tripled in the past year, leav­ing 168 firms in North Amer­ica, Europe and Asia hold­ing this debt, data com­piled by Bloomberg show. The ra­tio of net debt to earn­ings is the high­est in two decades. If oil stays at about $40 a bar­rel, the shake­out could be pro­found, ac­cord­ing to Kim­ber­ley Wood, a part­ner for oil merg­ers and ac­qui­si­tions at Nor­ton Rose Ful­bright LLP in Lon­don. West Texas In­ter­me­di­ate crude was up 4.5 per­cent to $40.32 a bar­rel at 10:51 a.m. in Lon­don.

"The look and shape of the oil in­dus­try would likely change over the next five to 10 years as com­pa­nies emerge from this," Wood said. "If oil prices stay at these lev­els, the num­ber of bank­rupt­cies and dis­tress deals will un­doubt­edly in­crease." Debt re­pay­ments will in­crease for the rest of the decade, with $72 bil­lion ma­tur­ing this year, about $85 bil­lion in 2016 and $129 bil­lion in 2017, ac­cord­ing to BMI Re­search. A to­tal of about $550 bil­lion in bonds and loans are due for re­pay­ment over the next five years. US drillers ac­count for 20 per­cent of the debt due in 2015, Chi­nese com­pa­nies rank sec- ond with 12 per­cent and U.K. pro­duc­ers rep­re­sent 9 per­cent.

In the U.S., the num­ber of bonds yield­ing greater than 10 per­cent has in­creased more than four­fold to 80 over the past year, ac­cord­ing to data com­piled by Bloomberg. Twenty-six Euro­pean oil com­pa­nies have bonds in that cat­e­gory, in­clud­ing Gulf Key­stone Petroleum Ltd. and EnQuest Plc.

Gulf Key­stone can "sat­isfy all its obli­ga­tions to both its con­trac­tors and cred­i­tors" af­ter author­i­ties in Kur­dis­tan, where the com­pany op­er­ates, com­mit­ted to mak­ing monthly pay­ments for crude ex­ports from Septem­ber, Chief Fi­nan­cial Of­fi­cer Sami Zouari said in an e-mail. An EnQuest spokesman de­clined to com- ment. Slump­ing crude prices are di­min­ish­ing the value of oil re­serves and re­duc­ing bor­row­ing power, even as pres­sure builds to find re­place­ment fields.

Some earn­ings met­rics are al­ready breach­ing the lows of the 2008 fi­nan­cial cri­sis. The profit mar­gin for the 108mem­ber MSCI World Energy Sec­tor In­dex, which in­cludes Exxon Mo­bil Corp. and Chevron Corp., is the low­est since at least 1995, the ear­li­est for when data is avail­able.

"There are sev­eral cred­its which sim­ply won't be able to re­fi­nance and ex­tend ma­tu­ri­ties and they may need to raise ad­di­tional eq­uity," said Eirik Rohmesmo, a credit an­a­lyst at Clark­sons Pla­tou Se­cu­ri­ties AS in Oslo. "The ques­tion is: would they be able to do that with debt at these lev­els?"

Some U.S. pro­duc­ers gained breath­ing space by lever­ag­ing their low-cost as­sets to raise funds ear­lier this year and re­pay debt, Gold­man Sachs Group Inc. wrote in a Aug. 6 re­port. This helped com­pa­nies shore up their cap­i­tal and re­duce debt-ser­vic­ing costs. That may no longer be an op­tion be­cause energy com­pa­nies have been the worst per­form­ers in the past year among 10 in­dus­try groups in the MSCI World In­dex.

Credit-rat­ing down­grades are putting ad­di­tional strain on the abil­ity of oil com­pa­nies to raise money cheaply. Stan­dard & Poor's cut the rat­ing of Eni SpA, Italy's big­gest oil com­pany, in April, while Moody's In­vestors Ser­vice down­graded Tul­low Oil Plc's debt in March. Spokes­men for Eni and Tul­low de­clined to com­ment.

The big­gest com­pa­nies, with global port­fo­lios that span oil fields to re­finer­ies, will prob­a­bly emerge largely in­tact from the slump, Nor­ton Rose's Wood said. Smaller play­ers, de­pen­dent on fewer as­sets, could have prob­lems, she said.

"Clearly, those com­pa­nies with debt to pay will have one eye firmly on oil prices," said Christo­pher Haines, a se­nior oil and gas an­a­lyst at BMI in Lon­don. "With rev­enues col­laps­ing and debt soon to ma­ture, a grow­ing num­ber of com­pa­nies may find them­selves un­able to meet re­pay­ment sched­ules."

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