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?
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.
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