By Selina Williams
LONDON--Just a few years ago, when oil prices were $100 a
barrel, banks here were lining up to give international oil
explorers access to billions of dollars to finance new drilling and
projects.
Now the money is drying up, as oil prices stay mired in a
prolonged funk.
Senior executives from companies such as Tullow Oil PLC and
Cairn Energy PLC have been meeting with their bankers for a twice
yearly 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 grow concerned 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, a person familiar with the matter said, reflecting a change
in mood. 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
a looming issue across the world with prices for crude near $40 a
barrel--down more than 60% since 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.
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 the mostly
Europe-based international explorers have come to rely more on bank
lending as investors that once pumped up the industry are now
fleeing in droves.
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.
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 independent 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
believes 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 $575 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
international oil explorers--firms 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 these
companies' 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.
There are factors working in the energy companies' favor.
The banks have an incentive not to turn the screws too tightly
on the oil companies, forcing them out of business and into default
on loans. Several companies also have made oil and gas fields 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. At Cairn, a round of cost cuts are allowing the company
to develop fields in the U.K. North Sea that are due to come
onstream next year, Mr. Thomson said.
Write to Selina Williams at selina.williams@wsj.com
(END) Dow Jones Newswires
March 29, 2016 08:50 ET (12:50 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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