High risk of bank­ruptcy for one-third of oil firms: Deloitte

The Pak Banker - - MARKETS/SPORTS -

Roughly a third of oil pro­duc­ers are at high risk of slip­ping into bank­ruptcy this year as low com­mod­ity prices crimp their ac­cess to cash and abil­ity to cut debt, ac­cord­ing to a study by Deloitte, the au­dit­ing and con­sult­ing firm. The re­port, based on a re­view of more than 500 pub­licly traded oil and nat­u­ral gas ex­plo­ration and pro­duc­tion com­pa­nies across the globe, high­lights the deep un­ease per­me­at­ing the en­ergy sec­tor as crude prices sit near their low­est lev­els in more than a decade, erod­ing mar­gins, forc­ing bud­get cuts and thou­sands of lay­offs.

The roughly 175 com­pa­nies at risk of bank­ruptcy have more than $150 bil­lion in debt, with the slip­ping value of sec­ondary stock of­fer­ings and as­set sales fur­ther hin­der­ing their abil­ity to gen­er­ate cash, Deloitte said in the re­port, re­leased Tues­day. "Th­ese com­pa­nies have kicked the can down the road as long as they can and now they're in dan­ger of kick­ing the bucket," said Wil­liam Sny­der, head of cor­po­rate re­struc­tur­ing at Deloitte, in an in­ter­view. "It's all about liq­uid­ity."

While 95 per­cent of oil pro­duc­ers can pro­duce crude for less than $15 per bar­rel - a tes­ta­ment to cost sav­ings and tech­no­log­i­cal im­prove­ments since mid-2014 when only 65 per­cent of pro­duc­ers could pro­duce near that level - that may not be enough for some, Deloitte found.

Pro­duc­ers are on track to slash bud­gets again this year, the first time that has hap­pened con­sec­u­tively since 2016, though many have said prices must rise fur­ther to boost prof­itabil­ity.

Some oil pro­duc­ers are also choos­ing to liq­ui­date hedges for a quick infusion of cash, a risky bet. "2016 is the year of hard de­ci­sions, where it will all come to a head," John Eng­land, vice chair­man of Deloitte, said in an in­ter­view. The Deloitte study found that oil­field ser­vice providers, which pro­vide staffing and equip­ment needed to drill wells, are fil­ing for fewer bank­rupt­cies than pro­duc­ers. That is likely due to the larger cap­i­tal costs - and there­fore debt - for pro­duc­ers, Deloitte found.

Of the 53 U.S. en­ergy com­pa­nies that filed for bank­ruptcy last quar­ter, only 14 were ser­vice providers, a trend that is ex­pected to con­tinue in the short term, Deloitte found.

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