As the price of oil has cratered, traditional financing alternatives across the energy industry have started to dry up. Where financing for new projects was once predominately bond issues, bank loans, and perhaps occasionally secondary stock offers, today energy companies increasingly need to look for new sources of project funding. Increasingly, financing today is coming from hedge funds, private equity shops, and even family office investments. Even publicly traded firms today are finding that they cannot access funding at favorable terms anymore.
Energy industry participants need to understand the new funding models and alternatives that those funding options create. In particular, private equity firms are increasingly interested in offering funding even to distress companies in the oil patch. Many of these same firms are essentially shut out of the high yield debt markets as the default rate on high yield energy bonds may move to as much as 10% next year.
The funding conundrum is being exacerbated by periodic bank revaluations of credit lines. While the fall revaluations in October were not as bad as some experts had forecast, there is little doubt that credit spigots have tightened dramatically. Companies that were spared the indignity of a credit line cut in October cannot rely on that same level of credit being available in as little as six months, let alone several years.
In the face of this situation, energy executives have to consider the alternatives.…