Is The Oil Industry Facing Financial Ruin?
Blackwell Global | Aug 27, 2015 02:24AM ET
As WTI Crude Oil prices continue to find downward pressure, the oil industry is facing structural change as some producers find difficulty in repaying debt and may face exiting the sector altogether.
As the price of West Texas intermediate has continued to slide, and subsequently reached the lowest levels in over six years, many are now questioning how the smaller producers will meet their upcoming bond repayments.
The number of oil and gas sector defaults is on the rise and bond yields are rising across the board for the sector. In fact, the number of bonds falling into the `distress’ range (exceeding 10% yield), has increased markedly over the past year. Whilst the price of crude oil remains below the $40.00 a barrel level the number of corporate bond instruments moving towards junk status will only increase.
Subsequently, the pressure upon small producers is likely to increase as the lacklustre oil prices and increasing bond yields start to eat into their cash flow. Considering that medium term modelling shows WTI prices remaining within the $30’s, the number of distressed bonds and resulting corporate insolvencies can only increase. In fact, according to BMI research, debt repayments are likely to top US$72 billion this year alone.
It is clear that the oil and gas sector is facing a reshaping and consolidation of epic proportions as producers, without the large cash reserves required to survive, will face an increasingly hostile debt market. This is also a global problem, given that Brent producers are suffering much of the same pricing pressures as their American counterparts.
This potential market rationalisation has been expected for some time but the artificial nature of the bond markets have extended out the rebalancing phase. However, as credit ratings continue todegrade, and firms start to face a steepening yield curve, cash reserves for the smaller producers are starting to run short.
Get The News You Want
In the long run, the larger explorers and production companies are likely to experience net gains from the market rebalancing. Ultimately, a diverse global portfolio of interests and strong balance sheet is likely to provide larger firms with continued access to debt markets and the required capital to survive the slump.
So in closing, keep a close eye on the oil industry, as things are about to get very interesting as a range of distressed bond holders find nothing but pain when it comes time for coupon payments.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.