Financing Oil and Gas Companies – 3/29/16

Oil prices look to stay low leaving many banks who had been financing the shale boom in an awkward position of cutting credit lines and selling off loans tied to the energy sector. Three months of 2016 have already passed as the glut keeps oil below $40 a barrel with no end in sight for beleaguered energy companies, many of whom have exhausted almost all measures available to stave off bankruptcy. Credit lines are tapped to the breaking point, efficiency and cost reductions are beyond anyone’s expectations. Hundreds of wells lay drilled and prepped for tapping even as more rigs go idle. Oil and gas companies have done and continue to do everything they can to avoid bankruptcy in the worst time for the industry since the global financial crisis in 2008 , but this crisis will likely be the end of hundreds of them.

Many oil and gas companies survived the sudden plunge in oil prices using bank loans. Surprisingly robust and generous credit lines gave shale drillers the cash needed to continue operations in exchange for guarantees based on future barrels to be sold when prices recover. Small and midsize companies borrowed disproportionately large amounts to expand during the shale boom when prices were above $100 a barrel and are now unable to produce a profit with their assets; they find themselves unable to make enough to meet interest payments and their lenders risking devastating default losses.

It should come as no surprise that banks are trying to reduce their exposure to the energy sector. This reduction would naturally mean cutting off oil and gas companies from credit life lines or as James J. Volker, CEO of Whiting Petroleum Corp., said at a Denver conference this month, he expects the company’s credit line to be reduced by $1 billion, or more than a third. Recent reviews of existing loans are also expected to turn up the heat on companies as a bank, deciding a company has already borrowed more than it can afford, could trigger a repayment, more cost cuts or a fire sale of assets to raise cash. All of which would be devastating to a company’s operations and reputation.

“This has the makings of a gigantic funding crisis” for energy companies, said William Snyder, head of Deloitte’s U.S. restructuring unit.

Still, banks are unlikely to imperil too many oil companies since forcing them out of business and into default would not benefit either side.

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