Oil Companies Running Out Of Options
The financial pressure on indebted oil and gas companies continues to mount, putting them in a bind as they try to mend their deteriorating balance sheets.
As their debt rises, drillers have had to divert more of their operating cash flow to servicing that debt. Or, put another way, as cash flow declines, a greater share of those resources are swallowed up by debt payments.
According to an analysis by the EIA, a group of 44 onshore oil and gas operators, responsible for 2.7 million barrels of oil production, are increasingly struggling to deal with falling oil prices. Between July 2014 and June 2015, an estimated 83 percent of the operating cash flow from these companies is dedicated for debt payments.
As the oil bust got underway late last year and in early 2015, oil companies had options. They could cut spending, take on new debt, issue new shares, or sell assets, to name a few.
Related: Does OPEC Have An Ace Up Its Sleeve?
In the first half of this year, the U.S. shale industry raised an estimated $44 billion in fresh debt and equity. Companies could roll over or refinance debt, taking on new loans in order to retire old ones. In a low-interest rate environment, lenders were very willing to do this. More importantly, in the first and second quarter of 2015, many lenders expected oil prices to rebound.
That optimism about oil prices has all but vanished at this point. As a result, it is becoming increasingly difficult for indebted companies to secure fresh loans – interest rates for high-risk companies are becoming prohibitively expensive. According to the EIA, the bond yields for energy companies with a credit rating in junk territory have shot above 11 percent, as the bond markets start to steer clear of high-yield energy debt. Debt and equity markets are all but shut off for distressed companies.
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