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28 April 2020

The Proximo Weekly Digest - Buoys for the black stuff?

Oil & gas
How long can bank liquidity last for the oil and gas sector? Arguably, for many small to medium operators, only as long as current overdraft facilities and reserves-based loans allow – and that won’t be long given reserves bases are generally re-evaluated twice a year and there are current widespread predictions of a 30%-plus cut in those values in the first half of 2020.

Even removing the global drop in demand caused by Covid-19 from the equation, the $10-$20 per barrel prices caused by the recent oil price war and the current production glut are likely to last way longer than banks willingness to continue extending credit beyond the tenor of pre-existing facilities.

The US is already being hit particularly hard. Whiting Petroleum filed for Chapter 11 bankruptcy earlier this month and Diamond Offshore Drilling has just joined it, unable to manage a debt pile of $2.6 billion. And more bankruptcies are on the way. According to independent energy research provider Rystad Energy, up to 533 US oil companies will go bankrupt if oil stays at around $20 a barrel. And the number of shutdowns is rising – according to a count by energy services company Baker Hughes, the number of US oil rigs fell to 378 last week, with 60 rigs shutting that week alone.

Many lenders have put repayments for troubled oil operators on hold to avoid ending up with distressed assets that they have little chance of recouping their money from after a sale. But debt restructuring appears to be a postponement of the inevitable for many, especially given the accepted break-even for US oil and gas operators of around $40 per barrel does not look like returning any time soon. And the chances of banks – according to IFR, of $500 billion of capital raised by US oil producers since 2016, about two-thirds was in the form of loans – extending new credit for operators other than the majors are highly unlikely at best.

Unlike the 2014-2106 oil price crash, few US oil producers filing for Chapter 11 are likely to find creditors willing to take equity for debt or similar restructuring options. In short, swathes of the US oil sector could be looking at liquidation and with it, huge potential write downs at banks that will hit their ability to lend to other sectors.

This is not a situation that a self-congratulatory tweet from President Trump is going to resolve – because the problem is not cutting global production further but the global slump in demand and when it will end. According to the Financial Times, an idea gaining favour among banks and hedge funds is for the US government to buy oil that producers leave in the ground until prices recover. At that point, the producers extract and sell the oil for a higher price than the government paid them, and then repay the government with interest at the Federal reserve base rate. It’s a solid idea – but one that will be a difficult political sell given the rise of ESG-awareness, even in the US. Arguably, the government could also, as an interim solution, artificially inflate the price per barrel via taxes and ban imports, and pile that extra tax money back into propping up the US oil industry – again, unlikely to be an election winner for Trump.

So, what to do? Aside from those lucky enough to be able to dust off a law degree and get into the current restructuring business, none of the options look appetising. Much depends on how long supply continues to vastly outweigh demand and that is anyone’s guess. Certainly, there will be opportunities for the acquisition of highly discounted US oil and gas assets, but those bargains are unlikely to be taken up by non-specialised investors given their experience to date of very low returns from US shale. And the supermajors are also unlikely to go on a shopping spree – they have all been mothballing schemes and making vast cuts to their predicted development spend for at least the next year.

Given the amount of cash equity investors and lenders stand to potentially lose on US oil and gas, whatever the outcome, confidence will be hit very hard for a very long time. Lawyers look set to make a killing – don’t they always – but any other type of stakeholder in the industry is going to take a hit, and key lenders to the sector will be making large provisions that will soak up general liquidity, the implications of which extend to all sectors of the project finance industry and beyond.


Selected news articles from Proximo last week


8minute adds 3GW to development pipeline

8minute Solar Energy has announced the addition of 3GW to its 18GW development pipeline of solar and storage projects across California and the American Southwest.


Hispasat Canarias close on satellite buyer's credit

Hispasat Canarias has reached financial close on a €129.2 million buyer's credit for its new Amazonas 6 telecommunication satellite.


Thai cogen power plant closes

Sponsors of the 92MW Nexif Energy Rayong small power producer gas-fired plant in Thailand – Nexif Energy Thailand (51%) and Thai infrastructure developer RATCH Group (49%) – closed a $60 million non-recourse loan to fund the project on 21 April.


REPDO sets Round Three tender deadlines

Saudi’s Renewable Energy Project Development Office (REPDO) has set October 7 as the bidding date for the two Category A solar schemes in its Round Three tender – the Wadi Ad Dawasir 120 MW Solar PV IPP and the Layla 80 MW Solar PV IPP.


IADB debars Brazil's AG Engenharia over illicit payments

The Inter-American Development Group has debarred Brazilian conglomerate Andrade Gutierrez Engenharia for three years and one month.

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