U.S. Oil Drillers To Face More Pain Despite Higher Prices

Date:

WTI is back above $50 a barrel, and things are looking up for the battered U.S. oil industry. Yet, although the worst may be behind drillers, they still face a lot of difficulties, including the danger of more loan defaults.

Thank you for reading this post, don't forget to subscribe!

Fitch Ratings warned about the continued threat of defaults in a recent update, noting the oil and gas industry would this year again be the one with the most defaults, according to a report by the Financial Times. In light of the troubles plaguing other industries hit hard by the pandemic, such as air travel and real estate, this is saying something.

Last year, several dozen oil and gas operators filed for bankruptcy with a cumulative debt of $28 billion, which far outstripped the cumulative debt of any other industry. This year, according to Fitch, the amount of debt in default will be lower, estimated at $15-18 billion, but it will still make oil and gas the worst performer in loan servicing.

The forecast of the ratings agency is in tune with other recent updates about what the immediate future holds for U.S. oil and gas. Rystad Energy, for instance, last month warned that the wave of bankruptcies that ravaged U.S. shale will lead to a sizeable production loss this year to the tune of 200,000 bpd. This will certainly be good for prices and therefore for other producers. However, the prospect of further defaults also has grim implications for those that survive.

“Low crude oil prices coupled with capital market accessibility will likely hamper many of the weaker energy issuers in 2021,” the Financial Times quoted Fitch leveraged finance senior director Eric Rosenthal as saying.

The second part of the statement is the more important one. Access to capital—borrowed capital, more specifically—has been getting tighter. The reasons for this tightening include U.S. shale oil’s cash-burning habits that had banks worried about debt redemption, growing investor discontent with the level of returns, and, finally, banks’ green pivot that has seen them become even more reluctant to lend to the oil and gas industry.
Related: India Oil Demand Falls For First Time In 20 Years Due To COVID

In fact, banks have gone so far in their attempts to signal virtue amid a strong anti-oil public discourse that they recently asked a federal regulator to cancel a proposed rule that would oblige them to continue doing business with the oil and gas industry.

The Office of the Comptroller of the Currency proposed the rule aiming for fair access to financing for all industries earlier this month, seeking to finalize it soon. Wall Street said that “would also appear to prohibit banks from using subjective judgment and qualitative considerations, including reputational risk, in deciding whether to provide a financial service, which is entirely inconsistent with how the OCC has historically expected banks to make risk management decisions.”

Banks, in other words, are worried that if they continue lending to oil and gas, their reputation will suffer damages. This is a very real possibility, even though a more cynical view on the matter would be that public opinion of banks has never really been great, especially since 2008. This very real possibility will further reduce the industry’s access to cash from banks, at least for a while. Things may change later as tightened supply pushes prices higher and, with them, lenders’ prospective returns on investing in the reputationally risky fossil fuel field.

It seems tighter supply is the only solution to the industry’s troubles. Demand for oil and gas is likely to remain sluggish for longer than expected as Europe and the United States both fail spectacularly in their vaccination effort, facing growing vaccine skepticism and much slower than expected rollout. This means restrictions will remain in force longer, which will continue to punish the industries that normally account for most of the oil demand: transport.
Related: Why Asian LNG Prices Are Going Through The Roof

Luckily for those with the means to survive the downturn, tightening supply will come naturally, not least because of the failure of those that will go bankrupt this year and possibly next. Meanwhile, the majority of industry executives are entering 2021 cautiously. There are no ambitious spending plans but also no drastic spending cut plans. In fact, most respondents in the most recent quarterly Dallas Fed survey of the oil industry said they expected a slight uptick in spending this year, signaling a reasonable amount of optimism despite all the challenges and risks of loan defaults.

In the first 11 months of 2020, a total of 43 exploration and production companies and 54 oilfield service providers in the United States filed for bankruptcy protection. Some will emerge from it healthier. Most will probably close shop and plug wells, taking thousands of barrels of daily production off the market. This will eventually benefit the survivors. Just how much it would benefit them, however, remains contingent on demand developments and these remain shrouded in mystery for now.

By Irina Slav for Oilprice.com

Share post:

Subscribe

Popular

More like this
Related

Mbah inaugurates ESUT Governing Council

Governor of Enugu State, Dr. Peter Mbah has inaugurated...

Canada-based Nigerian playwright, Oguntokun is dead

Renowned Nigerian playwright and theatre director, Wole Oguntokun, is...

Atiku’s loyalists declare support for Tinubu, Fubara

By Daniel Abia, P/Harcourt Members of the former Rivers State...

FAAN shuts KFC outlet at MMIA

In response to a social media report by a...
Social Media Auto Publish Powered By : XYZScripts.com

Discover more from Naija247news

Subscribe now to keep reading and get access to the full archive.

Continue reading