U.S. Shale Lifelines Running Thin
As the world heads towards the start of the winter fuel oil season, crude prices still show little sign of a sustained upward move. Instead, oil seems to be trapped in a new “normal” range of around $40 to $55 a barrel. Shale oil producers have done a remarkable job in adjusting to that change in the environment, but it remains to be seen what the eventual damage to companies in the sector will be once the last crude hedges from the pre-collapse period finally settle in 2016.
With that uncertainty just around the corner, it is little wonder that financing has proven challenging for many shale firms. What might be more surprising though is where the financing that is available is actually coming from. Unlike in the past, many shale firms are having great difficulty tapping financing from either banks or public equity markets. Instead shale firms are turning to private equity firms and other unconventional sources of financing. In a report earlier this year, Reuters noted that there was $44 billion in high yield debt and share sales for the first half of 2015. That issuance though has increasingly become unfeasible as the much hoped-for fast rebound in oil prices has failed to materialize.
Related: U.S. Shale Drillers Running Out Of Options, Fast
This lack of funding has created opportunities for patient and deep pocketed private equity firms. Asset sales, M&A deals, and bankruptcies have all been relatively limited thus far in the oil price fiasco in part because many firms had strong hedge positions, committed bank revolvers, and perhaps most importantly, because the spread between bid and ask prices on assets was wide.
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