Just a few years ago, when oil prices were $100 a barrel, banks were lining up to give international oil explorers access to billions of dollars to finance projects. Now the money is drying up, as oil prices stay mired in a prolonged funk.
Oil Explorers Face Challenge to Secure Financing as Oil Prices Fall
But as oil prices stay mired in a funk, the money is drying up.
Senior executives from companies such as Tullow Oil TUWOY PLC and Cairn Energy CRNCY PLC have been meeting with their bankers for a biannual review of the loans that allow them to keep drilling and building out projects.
For many European companies, it has been a nail-biting experience, as banks worry about the growing pile of debt taken on by oil companies with little or no profits. Several companies said they expect their ability to tap credit lines to be diminished after the reviews.
Some lenders have brought in teams that specialize in corporate restructuring to scrutinize companies’ balance sheets, spending and assets, though not at Tullow or Cairn, a person familiar with the matter said. In the past, the reviews were generally conducted solely by banks’ energy specialists.
The new scrutiny in Europe comes as oil-company debt emerges as an issue across the world with prices for crude near $40 a barrel—down more than 60% from June 2014. Globally, the net debt of publicly listed oil and gas companies has nearly tripled over the past decade to $549 billion in 2015, excluding state-owned oil companies, according to Wood Mackenzie, the energy consultancy.
Reviews of these loans have high stakes. If a bank decides a company has already borrowed more than it can afford, the reviews could trigger a repayment, more cost cuts or even a fire sale of assets to raise cash.
Many of the reviews have concluded, or will soon, and the results could be known as soon as this week.
“There isn’t anyone in the oil independent sector that will be very relaxed at the moment,” said Thomas Bethel, a partner specializing in energy finance at Herbert Smith Freehills LLP.
Oil companies are facing a similar set of biannual reviews in the U.S., where many small and midsize companies borrowed heavily to expand during the shale boom. The number of energy loans deemed in danger of default is on course to breach 50% at several major U.S. banks, The Wall Street Journal reported last week.
But some American firms have been able to raise cash by issuing new stock or selling new debt, while in recent years Europe-based explorers have come to rely more on bank lending as investors that once pumped up the industry are fleeing in droves.
In Europe, the focus is on a specialized type of borrowing known as reserves-based lending that has mushroomed in recent years. Europe’s top 10 non-state-owned oil companies have taken on over $12 billion in such loans, which are particularly exposed to energy prices as they are secured against the value of a company’s petroleum reserves and future production.
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