U.S. energy companies have been borrowing billions of dollars to continue pumping oil, despite the ever decreasing prices of crude oil. However, this trend is most likely about to come to an end.
As October nears, so does the moment when the banks will re-evaluate how much exactly energy companies are worth. Some cut backs were already made in spring, and it is a certainty that this round of evaluations will lead to additional cuts.
Small drillers are bound to run into major reductions in their credit lines, but with oil trading as low as $45 a barrel, the bigger outfits are also having issues while trying to remain profitable. Trying to prevent the worst in a desperate move to preserve cash, a number of smaller companies are negotiating with lenders, attempting to dump assets at distress-sale prices, and postponing payments to vendors.
Far Reaching Consequences
The worst of the financial pain will most likely be felt by the smaller players and heavily indebted companies, but the effect could have significant consequences on global oil markets as a whole. As of last month, the production of oil in the U.S. started to reduce, dropping by 3% or approximately 9.3 million barrels a day in June compared to the April’s peak. Capital limits could push that number down by additional half a million by the end of this year.
With industry experts predicting that the credit cuts in this latest round of evaluations could result in up to $10 billion of liquidity drying up, a lot of energy companies are right to be concerned. However, despite the cuts in credit, stronger companies will manage to cope, mainly by finding alternative ways of obtaining cash infusions, in many cases from private-equity investors.
And even if smaller companies do go down, most of their wells will most likely not stop production. As in most industries with a large number of smaller players, the bigger ones will pick up the choicest ones for a discount and the rest will most likely keep running under the control of their creditors for now with the expectation that oil prices will recover.