Washington May Take Stake In Struggling U.S. Oil Companies

The federal government may be about to offer the struggling U.S. oil industry loan financing in exchange for stakes, Bloomberg has reported, citing an unnamed source familiar with plans.

The plan, which the government could unveil later today, could include bridge loans and emergency loans from the Fed under a program aimed at helping small and medium-sized companies. These are the options favored by Treasury Secretary Steven Mnuchin, Energy Secretary Dan Brouillette told media earlier this week.

Mnuchin himself told media, "This is not going to be a bailout," adding that they were holding discussions about "a lot of different strategies."

Earlier this week, a second oil company filed for bankruptcy protection after Whiting filed for Chapter 11 in mid-April. Diamond Offshore Drilling said conditions in the industry had "worsened precipitously in recent months."

Many expect mass bankruptcies in U.S. oil, especially in the shale patch, where debt loads tend to be high and production costs not low enough for a prolonged price depression of the sort we are witnessing right now. Earlier this month, Norway's Rystad Energy warned that as many as 533 U.S. oil companies could go bankrupt if oil stays at around $20 a barrel.

West Texas Intermediate is currently trading at over $17 a barrel. While this is a lot better than the negative $37 a barrel the market saw on April 20, it is far below the breakeven rate of most U.S. oil producers.

The EIA's latest weekly petroleum report provided some positive signs of returning demand for fuels. It reported an unexpected decline in gasoline stocks, and this pushed WTI higher. It's too early to say, though, whether this will be a trend or a one-off occurrence. 

In any case, it will take a long time for prices to recover to levels that would ensure the survival of many, if not most, U.S. oil producers.

This fact certainly warrants government help, given how many jobs are at risk of disappearing. Yet a bailout will also inevitably draw vocal criticism from the anti-oil lobby.

By Irina Slav for Oilprice.com

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