Small- and medium-sized oil companies squeezed by the oil price slump may have to raise costly new funds, sell assets or seek new investors to plug financial gaps as banks tighten up on lending.
Many of these companies have already cut spending and axed thousands of jobs since June last year, when the oil price started a plunge that has bound it close to US$47 today.
But they may need to do more as revenue falls and the oil price looks set to stay low.
Oil’s fall last month to its lowest since early 2009 at just above $40 a barrel has dashed hopes in the oil industry for a swift recovery.
In many cases, banks lend money based on a company’s oil and gas reserves base in what is known as reserve-based lending. So, in theory, the lower the oil price outlook, the smaller the loan or credit line.
“Banks will be broadly supportive, but for some riskier clients and transactions there may be a gap in financing that didn’t exist before and they will have to find alternative financing,” said one banker who heads a loan syndicate.
“There is concern that banks will redenominate and reduce existing financing for energy companies. Banks are looking at this now. It’s a live issue.”
The companies and their banks sit down twice a year to review finances, which used to be a fairly routine conversation when oil was riding high.
Most companies emerged from the April round of talks, known as redeterminations, relatively unscathed because of expectations of an oil price recovery.
This month’s round may be more difficult, as banks will have cut their long-term oil price forecasts, according to several bankers and consultants.
“Managements and boards have had to come to terms in recent weeks with the lower-for-longer oil price view,” said Rupert Newall, BMO Capital Markets’ head of energy investment banking in Europe, the Middle East and Africa.
Exploration and production companies with large project financing needs include Africa-focused Tullow Oil and the North Sea producers Lundin Petroleum and Ithaca Energy, according to bankers and analysts.
Nomura has estimated Tullow Oil’s net debt will rise to $4.7 billion by the second half of next year, when its Ten project off Ghana’s coast is planned to start production. Tullow’s net debt at the end of the first half of this year was $3.6bn.
Tullow and Ithaca declined to comment. Lundin did not immediately respond to requests for comment.
Several oil companies in the United States that borrowed heavily to invest in shale have run into trouble this year, including Samson Resources in Oklahoma.
But Jo Clark, a transaction advisory consultant at Ernst and Young, said the chances of similar problems in Europe were low.
There have been a few casualties. The Oil producer Afren, for example, decided to go into administration in July when it failed to win support for a refinancing plan.
The credit rating agency Standard and Poor’s on Thursday cut its long-term corporate credit rating on the British oilfield services company Expro Holdings to CCC+ from B-, citing its high leverage and the challenging market conditions in oil and gas.
The oil price is just one element that goes into the mix for the banks.
Other factors such as a project’s break-even price and its expected start date can significantly influence the size and terms of a loan.
Also, hedging programmes undertaken by most companies can soften the impact of falling oil prices.
In terms of raising cash through asset sales, companies have been reluctant to sell because price tags slumped along with oil, while buyers have been holding back for even lower prices.
But financing needs may push some to turn sellers.
“We are starting to see some instances where banks are being put in a fairly difficult position of either following their money, finding an alternative capital source or calling time on companies. That is going to drive some transactions in the market,” said Ms Clark, referring to asset sales.
Private equity funds such as Carlyle Group, KKR and Riverstone have raised billions of dollars to invest in the energy sector.
“Some companies have used up their goodwill over renegotiating their covenants or needing various wavers signed around existing [loan] facilities, and have rationalised their capital programmes as best they can,” said Emma Wild, KPMG’s head of upstream advisory practice.
“The need to pay down debt and close funding gaps may result in a few bargains that those with capital have been holding out for.”
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