Tight Squeeze for Tight Oil | Russell T. Rudy Energy LLC
“World Oil” reports that banks typically reset loans to oil operators in April and October based on the average price of oil over the preceding 12 months. When oil was over $100 per barrel and interest rates were exceptionally low, many shale producers loaded up on cheap debt. However, with the implosion of crude prices, these loans are being re-evaluated and reductions of up to 30% are possible.
Some oil companies have been able to avoid a crisis by using crude futures contracts to mitigate falling prices, and by issuing additional shares of stock to raise capital. However, many futures contracts are about to expire, and some financially threatened companies are unable to raise cash in the equity market.
Operators need cash to drill new wells in order to produce more oil and generate cash to repay loans. When credit lines are reduced, the funds necessary to drill dry up, and ultimately so does cash flow from production. This can create a death spiral for some companies. For example, Sabine Oil and Gas Corp. borrowed heavily to finance a merger with Forest Oil Corp. last year. However, with lower prices and rising interest rates, Sabine faces the possibility of defaulting on $2 billion of debt if lenders do not grant a waiver.
The potential danger is certainly not confined to Sabine. With falling prices and rising interest rates the problem will only become more widespread. As Kristen Campana, a partner with New York based financiers Bracewell &Guiliani LLP observed, “People are expecting a much bigger rush of restructuring and negotiations in the fall.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2015/4/1/reckoning-arrives-for-cash-strapped-oil-firms-amid-bank-squeeze .
