Oil and gas companies that took a lot of loans and issued five- and seven-year notes in the “exuberance” years before 2014 are likely to get more favorable terms from lenders when they negotiate refinancing of debts worth a total of US$400 billion due by the end of 2019—because of the higher oil prices that boost their credit profiles.
According to data by Thomson Reuters LPC, the oil and gas sector has a combined US$833.3 billion of loans outstanding. Of those, US$399.5 billion is maturing by the end of next year, while US$138.4 billion is due by the end of this year.
Higher oil prices and increased oil production in the United States are also boosting the companies’ financial positions and they start to generate higher cash flows and boost profit margins.
“Back between the years of 2012 and 2014, there was an irrational exuberance going on where oil prices were high and interest rates were low and there were a lot of deals getting done,” Thomas Watters, managing director in the oil and gas ratings group at S&P Global, told Reuters. “A lot of high-yield credits came out first-time financing and they issued five- to seven-year papers. Higher oil prices will no doubt help them refinance.”
According to John Yovanovic, head of high yield portfolio management at PineBridge Investments, the credit market “ought to be thrilled with any WTI price above US$60 per barrel.” Related: Canada To Buy Kinder Morgan’s Trans Mountain Expansion Project
The market should be watching closely an increased default risk if oil prices drop below US$45-50 per barrel, Yovanovic told Reuters, but noted that he believed that WTI Crude “is not going sub-US$60 any time in the near future.”
Higher oil prices are also helping companies operating in the fastest-growing U.S. shale play, the Permian, to see their borrowing bases increased substantially.
Haynes & Boone’s latest survey found that more than 80 percent of U.S. oil companies expected borrowing bases this year to rise, which means the value of borrowers’ assets used as collateral when taking out loans will be higher.
By Tsvetana Paraskova for Oilprice.com
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