Baku. 12 April. REPORT.AZ/ Nearly two years into an epic oil rout, U.S. shale drillers that have upended global energy markets are finally feeling a credit squeeze as banks make their biggest cuts yet to their loans.
Every six months, oil and gas producers and their banks negotiate how much credit they should be given based on the value of their reserves in the ground.
Report informs citing Russian RBK, as oil prices nosedived by two-thirds since 2014, a belief took hold in global energy markets that for prices to recover, many U.S. shale producers would first have to falter to allow markets to rebalance.
With U.S. oil prices now trading below $40 a barrel, the corporate casualties are already mounting. More than 50 North American oil and gas producers have entered bankruptcy since early 2015, according to a Reuters review of regulatory filings and other data. While those firms account for only about 1% of U.S. output, based on the analysis, that count is expected to rise. Consultant Deloitte says a third of shale producers face bankruptcy risks this year.
At that rate, $10 billion more of bank credit will disappear as a remaining $50 billion or so of credit lines come under scrutiny in talks that stretch into May.
Companies and bankers contacted by Reuters declined to comment beyond their public statements due to the sensitive nature of the talks. The squeeze puts further pressure on the shale industry to sell assets, cut jobs and drilling and shrink capital spending. It also raises the risk that more companies will tip into bankruptcy.
Banks are also under more pressure now from regulators to limit their energy-related risks as the downturn drags on.
The next credit review in the autumn could take an additional toll if oil prices, now below $40 a barrel, do not rebound.
“Any company that does not have a widely profitable base at this current price is going to find it very, very hard,” said Christian Ledoux, senior portfolio manager at South Texas Money Management.
About 36 per cent of some 150 energy companies with speculative grade debt will probably default on their obligations by the end of next year if oil holds around $35 a barrel, said Tarek Hamid, senior US credit analyst at JPMorgan Chase & Co.
More than 50 North American oil and gas producers have entered bankruptcy since early 2015, according to a Reuters review of regulatory filings and other data. Oil and gas producers rely on revolving credit to finance day-to-day operations and cuts force them to looks for cash elsewhere.
Clayton Williams Energy Inc, for example, which had its credit line slashed to $100 million from $450 million, borrowed the difference from Ares Management LP, an alternative asset investor that charged triple the rate of the banks.
Fearing that falling crude prices and reserve values could push many companies into default, companies and bankers have been also renegotiating financial performance tests and claims on assets while resetting the borrowing limits.