http://oltnews.com/heavily-indebted...ained-by-collapsing-prices-the-new-york-times
Heavily indebted US oil companies further constrained by collapsing prices – The New York Times
1 day ago
Wall Street has supercharged the US energy boom of the past decade by making it easier for oil companies to finance growth with cheap borrowed money. Now this partnership is in ruins as the coronavirus pandemic has resulted in the fastest collapse in oil prices in more than a generation.
The energy sector has weakened in recent weeks as global demand for oil suddenly shrinks and oil prices plummeted, sparking a price war between Saudi Arabia and Russia. Oil prices are now one-third of their highest recent level, hitting $ 24 a barrel, and may fall further.
The crisis was a severe blow to the American oil and gas industry. Already heavily indebted, many companies are now struggling to pay interest on the debt they carry and are struggling to find new financing, which has become more expensive as traditional debt buyers have disappeared and the risks for the petroleum industry have grown. Companies are increasingly turning to restructuring advisers to manage their finances, and weaker companies may end up going bankrupt.
Collectively, the energy companies in the S&P 500 stock index have lost about 60% this year. Prices for bonds issued by US energy companies – both safer investment grade and riskier unwanted bonds – plummeted, while their yields soared.
Even the once unassailable energy giants seem fragile. On Monday, S&P Global Ratings downgraded the credit rating of the oil giant Exxon Mobil, citing the impact of the drop in oil prices on cash flows, and some analysts wonder if it will be able to continue paying its current dividend. A week after Occidental Petroleum cut its dividend, Moody’s Investors Service downgraded the company’s rating. Occidental is strained by its acquisition of Anadarko last year, which asked it to go into debt for $ 40 billion, and should now make big cuts in payroll.
“Shale players were already stretched to the limit, and the virus has just broken all the wires they were standing on,” said Ed Hirs, professor of energy economics at the University of Houston.
The American shale revolution started around 2008 when oil prices hovered at $ 150 a barrel and when the United States faced chronic energy shortages and dependence on Saudi Arabia and unstable producers like Venezuela and Nigeria. Over the next decade, investors – and the Wall Street bankers who welcomed them – were more than happy to provide financing for newcomers like Chesapeake Energy and Devon Energy, based in Oklahoma.
Interest rates were low and investors adopted the riskier debt that energy companies generally issued with the promise of higher yields. Energy companies have been among the largest unwanted bond issuers on Wall Street for the past 18 years, according to JPMorgan Chase’s analysis. Energy companies have been the largest borrowers of junk bonds in 10 of the past 11 years.
This borrowing frenzy meant that in 2014, almost all investors in junk bonds were highly exposed to the plight of these companies. Since 2016, when oil prices started to drop, 208 North American producers have filed for bankruptcy involving $ 121.7 billion in total debt, according to the Haynes and Boone’s Oil Patch Bankruptcy Monitor report released in late January. This means that many investors in these bonds have lost their capital. But the debt offered by companies that survived the collapse still accounts for more than 10% of the junk bond market.
“The main technological innovation has been financial innovation,” said Roman Rjanikov, portfolio manager at DDJ Capital Management in Waltham, Mass. “They somehow managed to convince investors that never generating cash was cool.”
The problem with this model, he said, is that “when you lose access to this capital, things collapse”.
Oil companies were already under pressure from falling oil and natural gas prices due to a warm winter, even before the coronavirus epidemic and the price war between Saudi Arabia and Russia. In addition, margins for refining and chemical production have decreased. And with Citi analysts projecting that the global benchmark price for Brent oil will drop to $ 17 per barrel, things could get worse.
In recent days, oil companies have sharply reduced their capital spending. In Texas, the epicenter of the shale drilling boom, companies have withdrawn at least $ 8 billion in the final days of their 2020 capital budget, removing drilling rigs and canceling hydraulic fracturing crews. The job losses that will follow are likely to be significant, worsening what should be a deep recession in the United States.
At the same time, large invoices are due. North American oil exploration and production companies have $ 86 billion of debt that will mature between 2020 and 2024, and pipeline companies have additional debt of $ 123 billion that matures during the same period, according to Moody’s.
Chesapeake Energy has $ 192 million in bonds maturing in August. With $ 9 billion in debt, the company is almost out of cash and has hired restructuring advisers, Reuters reported. Whiting Petroleum, another venture, is focusing on the North Dakota Bakken Shale, which has about $ 1 billion in debt maturing over the next year.
Oil services and drilling companies such as General Electric’s Halliburton, Schlumberger and Baker Hughes, as well as hundreds of small businesses, will be among the hardest hit by the latest drop in oil prices and the decline in exploration activity and production. North America’s petroleum services sector faces high funding risk with $ 32 billion in debt maturing between 2020 and 2024 – about two-thirds of which were issued by smaller, more speculative companies – according to Moody’s Investor Service.
But the entire energy industry is adapting. Parsley Energy, a leading producer of oil and gas in West Texas, has developed its 2020 investment budget assuming that oil prices will be between $ 30 and $ 35 for the rest of year. It is reducing its investment budget by more than 40% to less than a billion dollars and cutting the salaries of its leaders by at least 50% compared to last year. It has already reduced the drilling and fracturing crews and plans to further reduce them.
Parsley refinanced its debt in February and will not face a crisis for at least five years. Matt Gallagher, CEO of Parsley, said his business would survive, but he expects multiple bankruptcies in the industry. “There is no long-term rosy picture of debt,” he said.
Heavily indebted US oil companies further constrained by collapsing prices – The New York Times
1 day ago
Wall Street has supercharged the US energy boom of the past decade by making it easier for oil companies to finance growth with cheap borrowed money. Now this partnership is in ruins as the coronavirus pandemic has resulted in the fastest collapse in oil prices in more than a generation.
The energy sector has weakened in recent weeks as global demand for oil suddenly shrinks and oil prices plummeted, sparking a price war between Saudi Arabia and Russia. Oil prices are now one-third of their highest recent level, hitting $ 24 a barrel, and may fall further.
The crisis was a severe blow to the American oil and gas industry. Already heavily indebted, many companies are now struggling to pay interest on the debt they carry and are struggling to find new financing, which has become more expensive as traditional debt buyers have disappeared and the risks for the petroleum industry have grown. Companies are increasingly turning to restructuring advisers to manage their finances, and weaker companies may end up going bankrupt.
Collectively, the energy companies in the S&P 500 stock index have lost about 60% this year. Prices for bonds issued by US energy companies – both safer investment grade and riskier unwanted bonds – plummeted, while their yields soared.
Even the once unassailable energy giants seem fragile. On Monday, S&P Global Ratings downgraded the credit rating of the oil giant Exxon Mobil, citing the impact of the drop in oil prices on cash flows, and some analysts wonder if it will be able to continue paying its current dividend. A week after Occidental Petroleum cut its dividend, Moody’s Investors Service downgraded the company’s rating. Occidental is strained by its acquisition of Anadarko last year, which asked it to go into debt for $ 40 billion, and should now make big cuts in payroll.
“Shale players were already stretched to the limit, and the virus has just broken all the wires they were standing on,” said Ed Hirs, professor of energy economics at the University of Houston.
The American shale revolution started around 2008 when oil prices hovered at $ 150 a barrel and when the United States faced chronic energy shortages and dependence on Saudi Arabia and unstable producers like Venezuela and Nigeria. Over the next decade, investors – and the Wall Street bankers who welcomed them – were more than happy to provide financing for newcomers like Chesapeake Energy and Devon Energy, based in Oklahoma.
Interest rates were low and investors adopted the riskier debt that energy companies generally issued with the promise of higher yields. Energy companies have been among the largest unwanted bond issuers on Wall Street for the past 18 years, according to JPMorgan Chase’s analysis. Energy companies have been the largest borrowers of junk bonds in 10 of the past 11 years.
This borrowing frenzy meant that in 2014, almost all investors in junk bonds were highly exposed to the plight of these companies. Since 2016, when oil prices started to drop, 208 North American producers have filed for bankruptcy involving $ 121.7 billion in total debt, according to the Haynes and Boone’s Oil Patch Bankruptcy Monitor report released in late January. This means that many investors in these bonds have lost their capital. But the debt offered by companies that survived the collapse still accounts for more than 10% of the junk bond market.
“The main technological innovation has been financial innovation,” said Roman Rjanikov, portfolio manager at DDJ Capital Management in Waltham, Mass. “They somehow managed to convince investors that never generating cash was cool.”
The problem with this model, he said, is that “when you lose access to this capital, things collapse”.
Oil companies were already under pressure from falling oil and natural gas prices due to a warm winter, even before the coronavirus epidemic and the price war between Saudi Arabia and Russia. In addition, margins for refining and chemical production have decreased. And with Citi analysts projecting that the global benchmark price for Brent oil will drop to $ 17 per barrel, things could get worse.
In recent days, oil companies have sharply reduced their capital spending. In Texas, the epicenter of the shale drilling boom, companies have withdrawn at least $ 8 billion in the final days of their 2020 capital budget, removing drilling rigs and canceling hydraulic fracturing crews. The job losses that will follow are likely to be significant, worsening what should be a deep recession in the United States.
At the same time, large invoices are due. North American oil exploration and production companies have $ 86 billion of debt that will mature between 2020 and 2024, and pipeline companies have additional debt of $ 123 billion that matures during the same period, according to Moody’s.
Chesapeake Energy has $ 192 million in bonds maturing in August. With $ 9 billion in debt, the company is almost out of cash and has hired restructuring advisers, Reuters reported. Whiting Petroleum, another venture, is focusing on the North Dakota Bakken Shale, which has about $ 1 billion in debt maturing over the next year.
Oil services and drilling companies such as General Electric’s Halliburton, Schlumberger and Baker Hughes, as well as hundreds of small businesses, will be among the hardest hit by the latest drop in oil prices and the decline in exploration activity and production. North America’s petroleum services sector faces high funding risk with $ 32 billion in debt maturing between 2020 and 2024 – about two-thirds of which were issued by smaller, more speculative companies – according to Moody’s Investor Service.
But the entire energy industry is adapting. Parsley Energy, a leading producer of oil and gas in West Texas, has developed its 2020 investment budget assuming that oil prices will be between $ 30 and $ 35 for the rest of year. It is reducing its investment budget by more than 40% to less than a billion dollars and cutting the salaries of its leaders by at least 50% compared to last year. It has already reduced the drilling and fracturing crews and plans to further reduce them.
Parsley refinanced its debt in February and will not face a crisis for at least five years. Matt Gallagher, CEO of Parsley, said his business would survive, but he expects multiple bankruptcies in the industry. “There is no long-term rosy picture of debt,” he said.
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