Breaking News
0

Shale Oil Companies Beware, Your Day Of Reckoning May Be Here

By Ellen R. Wald, Ph.D.Stock MarketsSep 17, 2015 05:06AM ET
www.investing.com/analysis/the-creditors-are-comingfor-the-oil-fields-265343
Shale Oil Companies Beware, Your Day Of Reckoning May Be Here
By Ellen R. Wald, Ph.D.   |  Sep 17, 2015 05:06AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The day of reckoning for America’s shale oil producers finally may be just around the corner. After surviving for nearly a year on crude oil prices too low to cover operational costs, the Wall Street financiers that have kept firms alive with lines of credit, generous financing, and deferred interest payments are getting ready to call in the loans.

Federal regulations dictate that creditors must re-evaluate the worth of the companies they actively loan money to twice a year – in June and October. Last June, oil was trading for around $60/barrel. October is coming and oil prices are just pushing $45/barrel.This is bad news for oil companies, many of whom haveunflattering balance sheets and could find their loans labeled “troubled.” Once a loan is marked “troubled” by the Office of the Comptroller of the Currency (OCC), a bank must set aside additional capital to cover the credit risk. This is basically the kiss of death for an energy firm, because it destroys the likelihood of securing any further financing from national banks.

How are energy companies responding?

  • Raising as much cash as they can by selling assets. W&T Offshore Inc (NYSE:WTI) is putting a Texas shale-oil field up for sale for only $376.1 million. This is half of what it was valued at last year. Still, this cash would only benefit the company marginally, as its $600 million line of credit has already been cut twice this year. In July, Comstock Resources Inc (NYSE:CRK) sold assets in Burleson County, Texas, and Austin Exploration (ASX:AKK) is on the hunt for buyers for a 5,000-acre oil and gas property in the same region. Look for other assets like pipelines, natural gas fields, and even idling oil rigs to go on sale at cut-rate prices. Private equity firms will be the first to snatch them up.
  • Selling shares to raise cash. The Wall Street Journal reports that publicly trading firms in the U.S. and Canada have raised $21 billion by issuing shares this past year. RSP Permian (NYSE:RSPP) raised $232 million this way over the summer, and Encana Corporation (NYSE:ECA) and Noble Energy Inc (NYSE:NBL) got a jump on reducing their debt early in 2015 by issuing shares in February and March and raising $1 billion each. But this avenue seems to be drying up as offerings slowed to a trickle in August. Investors should be cautious with firms that are currently looking to raise capital in this way. The healthier firms already took advantage of this strategy earlier in the year.
  • Negotiating with creditors ahead of the October review. Halcon Resources Corp (NYSE:HK), which has already lost 90% of its market value since 2014, renegotiated its agreement with creditors over the summer, but it had to relinquish a stake in its oil and gas assets and accept 13% interest rates in exchange for some debt forgiveness. Yes, 13%! Sandridge Energy Inc (NYSE:SD) has refinanced $525 million in debt, but has approximately$4 billion of outstanding loans. Magnum Hunter Resources (NYSE:MHR), after defaulting briefly this summer, arranged for a fifth extension with its lenders. These companies are in bad shape. A successful renegotiation with a creditor might give them a positive headline, but these moves are just bandages designed to stave off default a little longer in hopes of a sale or other fortuitous events.

All of this sounds like doom and gloom for the energy sector, but it really is not. Investors and lenders can learn a lot right now about which companies will thrive. How and when shale oil companies deal with their debt is key to predicting which companies will survive in an era of low oil prices, and which companies will not.

Firms that ignored many of the experts last winter and anticipated a long-lasting downturn in crude prices already moved to pay down debt, consolidate loans, or raise capital earlier. Those prescient firms are now much better positioned to weather the coming credit crunch. On the other side of the equation, private equity firms are now approaching a feast of oil asset opportunities that could offer the potential for quick turnarounds.

Shale Oil Companies Beware, Your Day Of Reckoning May Be Here
 
Shale Oil Companies Beware, Your Day Of Reckoning May Be Here

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email