Oil price has remained in the US$40s per barrel. With mounting debts and low revenue, many shale oil companies could find themselves in financial distress in the next few months due to the following factors:
1) Data from the US Energy information Administration showed that the percentage of debt service vs operating cash flow has increased from 40+% in Q1 2012 to 80+% in Q2 2015. This means that a large chunk of the revenue is used just to service debts. How long could these companies last?
2) Oil price at persistently low levels is not helping either, despite the fact that many producers say that they are improving their efficiency and that they could produce more at lower costs. This is true, but will they ever generate enough cash to pay off the debts and capital invested in field. Most companies use EBIDTA to measure their progress. This is hugely misleading as we now know that the Interest (from debts) is high and so is the Depreciation (investment in oil field and machinery).
3) Financial institutions will be reviewing US shale oil companies from October - November whether to increase, maintain or reduce their credit lines. Some may not meet the new standards due to a shrinking balance sheet.When oil price declines, so too will be the value of the oil fields.
Here's an interesting article from thestreet.com which highlights the number of companies which could face some fianncial challenges ahead.
http://www.thestreet.com/story/13301491/1/how-many-more-oil-gas-companies-will-file-for-bankrptcy.html
No comments:
Post a Comment