Despite the major oil price crash of last year, U.S. oil exploration and production companies were still able to raise capital by selling equity or debt. However, the situation has changed dramatically as less people are willing to invest, putting a serious financial strain on the industry.
Survival of the Fittest
There is no fear the shale industry is in real danger as since U.S. oil production’s took off in 2009, the industry has built a number of strong companies with positive balance sheets and low costs which will have no trouble coming out on the other side of this crisis largely unscathed.
Even so, given the diversity in the financial health of companies involved in shale industry, there are still plenty of players stuck with high costs and significant debt that may face a less than certain future. This year already, there have been 16 defaults by U.S. oil production companies.
As of right now, there are eight companies with a CCC or lower rating, giving them about a year maximum before they run out of cash. For analysts this means that new wave of acquisitions, mergers, asset deals, and bankruptcies is about to get underway.
While a lot of the companies managed to get through their March and April borrowing base redeterminations more easily than expected, as financiers expected oil prices to rebound quickly. The stubbornly low value of oil since then will have changed that optimistic perspective and banks will be using much lower assumptions going forward which could cause some companies significant funding problems.
In order to convince banks and investors to back them, companies will have to reassess their costs. Plenty of companies have already made some significant changes pushed by the pressure from the falling prices of both oil and natural gas. Some have achieved extraordinary results, cutting their costs by as much as 25 percent while simultaneously raising productivity.
Not all of the companies were able to this though, and the banks will probably find themselves cutting their losses. It is certain that the rebalancing of the market will be a long process, and that a number of shale oil producers will shrink dramatically before the process is complete.