A Credit Line Reset Looms Over Cash-Strapped Oil Drillers
By Christine Idzelis and Asjylyn Loder Jan 20, 2015 10:28 AM ET
Oil and gas companies have April circled on their calendars.
That’s when their lenders will recalculate the value of properties that energy companies staked as loan collateral. With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend, crimping the ability of U.S. drillers to keep production growing.
“This could start a downward spiral for some of these companies because liquidity will dry up,” said Thomas Watters, managing director of oil and gas research for Standard & Poor’s in New York. “I call it a liquidity spiral. They’ll start burning right through cash.”
More than 20 U.S. exploration and production companies have used at least 60 percent of their credit lines, according to Bloomberg Intelligence analyst Spencer Cutter. The energy industry is facing a cash squeeze after U.S. oil prices fell 60 percent since June. Drillers have already cut spending to conserve cash. If credit lines are cut, the most indebted producers will be left scrambling to raise money elsewhere. New loans will be expensive -- if they’re available at all.
The credit lines, which typically are reset each spring and fall based on the value of borrowers’ petroleum reserves, operate like credit cards. To pay them off, companies have in the past sold off assets or issued bonds. The value of oil properties has declined at the same time that the borrowing environment for energy companies has gotten worse.
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http://www.bloomberg.com/news/2015-01-20/a-credit-line-reset-looms-over-oil-drillers.html
