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 TUWOY -2.91 % PLC and Cairn Energy CRNCY -1.03 % 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 breach 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. XOM 0.37 % 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.
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Anthony Rizzo Players Can't Sit On Bench According to a report from the Chicago Sun-Times, the world-famous Anthony Rizzo Phrase "Zombie Rizzo" has been told to never be used again. Of course, this is not the first time that the Zombified Chicago Cubs' first baseman has made headlines this year. A year ago, "Rosebud" was the catchphrase that he coined for himself. Also, there is Anthony Rizzo Shirts that come in his name. Now that the Cubs are World Series Champions, Anthony Rizzo is on his way to superstardom. He is leading the World Series in several categories, including hits, runs, home runs, RBI's, OBP, and SLG. Also, he's on track for a staggering year in hits, RBI's, and total bases, all while being second in home runs.
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It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.
And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.
That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.
The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.
In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.
The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.
But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.
With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.
But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.
A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.
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