Global Explorers Face Challenge To Secure Financing Amid Oil Rout
March 30 2016 - 2:02AM
Dow Jones News
(FROM THE WALL STREET JOURNAL 3/30/16)
By Selina Williams
LONDON -- Just a few years ago, when oil sold for about $100 a
barrel, banks here were lining up to give international oil
explorers access to billions of dollars to finance new drilling and
projects.
But as oil prices stay mired in a funk, the money is drying
up.
Senior executives from companies such as Tullow Oil PLC and
Cairn Energy PLC have been meeting with their bankers for a
biannual review of the loans that allow them to keep drilling and
building out projects. For many European companies, it has been a
nail-biting experience, as banks worry about the growing pile of
debt taken on by oil companies with little or no profits.
Several companies said they expect their ability to tap credit
lines to be diminished after the reviews.
Some lenders have brought in teams that specialize in corporate
restructuring to scrutinize companies' balance sheets, spending and
assets, though not at Tullow or Cairn, a person familiar with the
matter said. In the past, the reviews were generally conducted
solely by banks' energy specialists.
The new scrutiny in Europe comes as oil-company debt emerges as
an issue across the world with prices for crude near $40 a barrel
-- down more than 60% from June 2014.
Globally, the net debt of publicly listed oil and gas companies
has nearly tripled over the past decade to $549 billion in 2015,
excluding state-owned oil companies, according to Wood Mackenzie,
the energy consultancy.
Reviews of these loans have high stakes. If a bank decides a
company has already borrowed more than it can afford, the reviews
could trigger a repayment, more cost cuts or even a fire sale of
assets to raise cash. Many of the reviews have concluded, or will
soon, and the results could be known as soon as this week.
"There isn't anyone in the oil independent sector that will be
very relaxed at the moment," said Thomas Bethel, a partner
specializing in energy finance at Herbert Smith Freehills LLP. Oil
companies are facing a similar set of biannual reviews in the U.S.,
where many small and midsize companies borrowed heavily to expand
during the shale boom. The number of energy loans deemed in danger
of default is on course to extend above 50% at several major U.S.
banks, The Wall Street Journal reported last week.
But some American firms have been able to raise cash by issuing
new stock or selling new debt, while in recent years Europe-based
explorers have come to rely more on bank lending as investors that
once pumped up the industry are fleeing in droves.
In Europe, the focus is on a specialized type of borrowing known
as reserves-based lending that has mushroomed in recent years.
Europe's top 10 non-state-owned oil companies have taken on over
$12 billion in such loans, which are particularly exposed to energy
prices as they are secured against the value of a company's
petroleum reserves and future production.
At Tullow, Chief Financial Officer Ian Springett said he thinks
the company could lose some ability to draw on its $3.7 billion
credit line with its banks. Cairn expects its banks will allow it
access to only about $335 million of the $400 million in credit
that was once available.
"When oil was at $100 a barrel, debt was easy to get," Cairn
Chief Executive Simon Thomson said in an interview. "What we're
seeing today is a number of people suffering the hangover of having
secured that debt and now possibly having trouble servicing
it."
The stakes were underscored in February when First Oil Expro, a
subsidiary of the largest privately owned U.K. North Sea oil
producer, called in the administrators -- a process similar to
filing for chapter 11 bankruptcy in the U.S. First Oil Expro was
unable to meet its share of costs on one big development and was
unable to keep up payments on loans in excess of $150 million.
"The key issue around First Oil Expro's demise was the sharp
fall in the oil price which led to a significant loss of confidence
in the sector," said Jim Tucker, joint administrator of First Oil
Expro and restructuring partner at KPMG.
The oil-company debt reviews come at a tough time for oil
explorers that aren't brand names but take risks to open up fields
in risky regions that bigger companies such as Exxon Mobil Corp.
often tap into later, such as Kurdistan in Iraq.
Investors pulled back from these companies as oil prices fell,
sending share prices into the basement. That crimped their ability
to raise cash by issuing new stock or selling new debt, such as
corporate bonds, analysts say. The explorers' revenues also fell,
and many had to cut the value of their fields and reserves.
Some factors are working in the energy companies' favor. Banks
have an incentive not to turn the screws too tightly on oil
companies, forcing them out of business and into default on loans.
Several companies also have oil and gas fields that are set to
begin production soon and provide a jolt of cash.
At Tullow, Mr. Springett said the company was on firm ground
because a large oil field in Ghana is due to begin pumping later
this year. And Cairn is developing fields in the U.K. North Sea
that are due to come onstream next year, Mr. Thomson said.
(END) Dow Jones Newswires
March 30, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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