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The Scariest Number For The Oil Industry: $550 Billion

Tyler Durden's picture




 

Just over half a trillion dollars: that's how much cash oil industry companies will need to repay in maturing debt over the next 5 years.

Specifically, according to BMI Research cited by Bloomberg, there is $72 billion in oil-related debt maturing this year, $85 billion in 2016 and $129 billion in 2017, and a total of $550 billion in bonds and loans through 2020.

This is a problem because while paying annual interest is one thing and easily manageable, rolling over debt when it is yielding over 10% - as is the case for over 168 global companies, or triple last year's number - is virtually impossible. It is an even bigger problem when considering the recent surge in energy company net debt/EBITDA (shown below in red) which has recently hit an all time high, surpassing the oil sector crisis of 1999, dragging energy sector credit risk and spreads with it to all time highs.

 

In fact, unless oil soars higher and miraculously concludes a second dead cat bounce, there will be hundreds of companies which are simply unable to refinance, and have no choice but to default. Considering that 20% of total debt due in 2015 belongs to US drillers (with Chinese companies coming in second with 12%), what was until last week perceived a junk bond crisis, and has been largely forgotten this week following the artificial, central-bank inspired price-action euphoria when in reality absolutely nothing has changed on the cash flow scene, expect the hangover of the post month-end window dressing orgy to come down like a ton of bricks.

The reason: fundamentals continue to go from bad to worse, and its not just the fwd P/E chart we won't tire of showing...

... as Bloomberg adds, some earnings metrics are already breaching the lows of the 2008 financial crisis. The profit margin for the 108-member MSCI World Energy Sector Index, which includes Exxon Mobil Corp. and Chevron Corp., is the lowest since at least 1995, the earliest for when data is available.

“There are several credits which simply won’t be able to refinance and extend maturities and they may need to raise additional equity,” said Eirik Rohmesmo, a credit analyst at Clarksons Platou Securities AS in Oslo. “The question is: would they be able to do that with debt at these levels?”

The answer is no, as we showed ten days ago.

It gets worse:

Some U.S. producers gained breathing space by leveraging their low-cost assets to raise funds earlier this year and repay debt, Goldman Sachs Group Inc. wrote in a Aug. 6 report. This helped companies shore up their capital and reduce debt-servicing costs.

 

That may no longer be an option because energy companies have been the worst performers in the past year among 10 industry groups in the MSCI World Index.

 

Credit-rating downgrades are putting additional strain on the ability of oil companies to raise money cheaply. Standard & Poor’s cut the rating of Eni SpA, Italy’s biggest oil company, in April, while Moody’s Investors Service downgraded Tullow Oil Plc’s debt in March.
Spokesmen for Eni and Tullow declined to comment.

It is the small companies who will face the creditor firing squad first:

“Clearly, those companies with debt to pay will have one eye firmly on oil prices,” said Christopher Haines, a senior oil and gas analyst at BMI in London. “With revenues collapsing and debt soon to mature, a growing number of companies may find themselves unable to meet repayment schedules.”

The only loophole: if oil somehow does rebound to $60 or above, which absent a Saudi collapse or a Chinese recovery, will not happen for a while. If not, the current period of calm, where companies are racing for the producing bottom, will very soon come to an end as will the disposable cash of the energy industry. At that point the administration will have to make a choice: bail out the energy sector or reap the consequences.

 

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Thu, 08/27/2015 - 21:53 | 6479900 Hohum
Hohum's picture

No problem.  550/$25 barrel = 22 billion barrels.  Of course, then there are operating costs.  Can we outsource oil rig work to Bangladesh?

Thu, 08/27/2015 - 22:04 | 6479940 Ballz
Ballz's picture

I hope those fuckers have to drink it to survive. The rise in gas prices to over $3.00/gallon is part of what started this mess to begin with....

Fri, 08/28/2015 - 09:20 | 6481094 Agstacker
Agstacker's picture

Why get angry at the oil companies?  It's the bankers that lend them the money, then manipulate the market to their own advantage to buy up everything on the cheap that you should get pissed at.

Thu, 08/27/2015 - 21:53 | 6479901 Budnacho
Budnacho's picture

Gas goes up a 5 bucks a gallon...problem solved....next...

Thu, 08/27/2015 - 21:53 | 6479905 JungleCat
JungleCat's picture

The Fed will buy their debt.

The Fed loves having questionable debt on their balance sheet.

Thu, 08/27/2015 - 22:15 | 6479966 Ms No
Ms No's picture

That may not be out of the realm of possibility especially if one supports the belief that the US wanted the Sauds to drop the oil price and punish Russia.  The industry has been way too silent on this issue, you would think they would be screaming at the top of their lungs.  Haven't even heard a peep out of the T-Boone Pickens crowd about bombing Saudi into oblivion.  Furthermore, the banks of obviously been helping these guys out for quite some time.

Fri, 08/28/2015 - 00:04 | 6480208 WillyGroper
WillyGroper's picture

since rottenfeller dumped his XOM you can bet the vulture will sweep in to mop up the mess.

then it'll be $30 a gal for the peeps.

Fri, 08/28/2015 - 02:51 | 6480413 Grandad Grumps
Grandad Grumps's picture

The banks are into busting up monarchies these days... at least that's what their actions have shown. The Saud are just another monarchy, but it looks bad if the banks invade the country through their proxies as they have done with other Middle Eastern countries.

After all, the banks and Saud are supposed to be working together.

Thu, 08/27/2015 - 21:54 | 6479908 KnuckleDragger-X
KnuckleDragger-X's picture

That's not the scariest number for the oil industry, that's the scariest number for the people holding those debts......

Fri, 08/28/2015 - 00:25 | 6480216 IRC162
IRC162's picture

Bankers with hard hats- operating an oil platform near you soon, along with their debt covenant ratio breach-induced 'Management Fees' to completely suck the cash flow dry...

Modern day vampires

Thu, 08/27/2015 - 22:13 | 6479960 Haole
Haole's picture

Step aside spammer, Jim Willie gives yet another great interview.

 

https://www.perpetualassets.com/news/2015/08/27/we-are-at-war/

Fri, 08/28/2015 - 00:08 | 6480217 WillyGroper
WillyGroper's picture

This one is even better.

SGT did the interview & someone lifted it w/o credit.

WARNING: THE BULLION BANKS ARE LOSING CONTROL - Jim Willie - YouTube

Fri, 08/28/2015 - 07:53 | 6480741 new game
new game's picture

jim has been sipping the kool aid, kinda says alot about these folks, off the deep edge.

 

Thu, 08/27/2015 - 22:16 | 6479971 Colonel Klink
Colonel Klink's picture

Just take it from executive bonuses, problem solved!

Thu, 08/27/2015 - 22:19 | 6479980 hooligan2009
hooligan2009's picture

ok, lets see..$550B = 11 billion barrels ...estmated reserves = 2.6 trillion barrels....RESULT!

http://instituteforenergyresearch.org/topics/encyclopedia/oil-shale/

well as long as oil doesnt get below 2c cent a barrel (plus 25 dollars in obama care costs and 30 dollars in pensions) and they dont't invent wireless electricity :)

https://youtu.be/xDX8W_UqAW0
Thu, 08/27/2015 - 22:30 | 6480016 Hohum
Hohum's picture

hooligan2009,

How much math did you take in school?

You are assuming the "reserves" will be extracted in five years.

Actually, world oil production (for now) is about 30 billion barrels per year.  150 billion barrels over five years.  If the price rises enough to enable the sale of 11 billion barrels to pay $550B, then 7.3% of production will do it.  If it takes 22 billion, 14.6%

Fri, 08/28/2015 - 02:45 | 6480406 Grandad Grumps
Grandad Grumps's picture

The banks will own the reserves by then.

Thu, 08/27/2015 - 22:43 | 6480049 Ms No
Ms No's picture

Shale lobbied the hell out of the SEC in 08-09 to book more proven undeveloped reserves.  It was called "the modernization of gas and oil reporting requirements". 

According to Bill Powers.. "This rule allowed shale gas to not only avoid taking a writedowns on their proven reserves but to show significant growth in proven reserves thus help them keep their all important F&D costs artificially low"

This is only one of their tricks of which I know a few, this is Jeffry Skilling stuff.

Thu, 08/27/2015 - 22:21 | 6479986 techpreist
techpreist's picture

Damn glad I sold out of oil stocks on time; if I stayed in I'd have lost 85% by now. Still, if I had been less emotional and got out sooner I probably would have netted 10% instead of 3% (over the three months I was in) on the dead cat bounce earlier this year.

Always have an exit strategy.

Thu, 08/27/2015 - 22:25 | 6479999 punkasscrab
punkasscrab's picture

Then they better get to drilling, huh?

Thu, 08/27/2015 - 22:38 | 6480037 homiegot
homiegot's picture

My Ford F-350 duelly was repossessed. 

Thu, 08/27/2015 - 23:46 | 6480181 22winmag
22winmag's picture

550 Billion?

Wall Street must be involved somehow.

Fri, 08/28/2015 - 00:30 | 6480246 Drop out
Drop out's picture

It's not the loneliest number that you'll ever hear.

 - 1

Fri, 08/28/2015 - 00:43 | 6480270 erk
erk's picture

5 years is a long time, the whole industry could rebound by then.

Fri, 08/28/2015 - 00:53 | 6480287 CHX
CHX's picture

But but, the recent US shale boom and fracking industry was SUCH a success that this surely is peanuts, right ?

 

/s

Fri, 08/28/2015 - 02:05 | 6480346 MSimon
MSimon's picture

The fracking revolution  is not about profitability. It is about lowering the cost of recovery. Profits will depend on the price of oil.

 

So the majors have wells that were profiable at $100 bbl and are not at $40 a bbl? So what?

 

If they want to stay in business they will have to sell off their losers. The usual.

 

All this says nothing about the success of fracking. A fracked well profitable at $40 a bbl will not do a damned thing about wells that require $100 a bbl to be profitable.

 

You know. There used to be a LOT of clear thinkers on this board. Nowadays? Not so much.

Fri, 08/28/2015 - 01:53 | 6480337 MSimon
MSimon's picture

Oil companies go bankrupt? Price Discovery!

 

So they sell their assets and the basis for oil prices goes even lower. Explain the problem again? Other than owning oil stocks.

 

And fracking? The technology is not going away. If a well was profitable at $40 a bbl. It is still profitable at $40 a bbl. And the wells that are not profitable? Bankruptcy will fix that. And then? Price Discovery!

Fri, 08/28/2015 - 02:14 | 6480360 MSimon
MSimon's picture

One other thing. Reserves will have to be repriced.

 

 

Fri, 08/28/2015 - 02:44 | 6480401 Grandad Grumps
Grandad Grumps's picture

So, the collateral for the loans is the equipment and mineral rights?

Banks win again.

Fri, 08/28/2015 - 03:04 | 6480432 SmittyinLA
SmittyinLA's picture

XTO looks pretty cheap next to 550B

Fri, 08/28/2015 - 04:35 | 6480524 johmack2
johmack2's picture

This is where looking at balance sheets of financial companies come in(which zerohedge wont do), But its an easy thing to do to find out which companies are capable of surviving low oil prices. with just the tips of their fingers burnt versus those who will get chopped in half. Ill give you guys a clue excessive debt to equity and percentage of  operating income used to finance said debt.

 

Fri, 08/28/2015 - 05:39 | 6480573 falak pema
falak pema's picture

You mean its smaller then the student loan crisis?

Fri, 08/28/2015 - 08:21 | 6480823 wrs1
wrs1's picture

And lot's of them make plenty of money enough to pay off the debt as opposed to 23% of students not paying down any debt in the last year and yet those loans are not defaulted.

Fri, 08/28/2015 - 06:49 | 6480629 Last of the Mid...
Last of the Middle Class's picture

You're fracking kidding me!!!!  lol

 

Fri, 08/28/2015 - 10:59 | 6481548 Arthur
Arthur's picture

Which is why the the USA will once again allow the unfettered exportation of oil and gas.

But first there must be pain and a "dire" need to save American jobs.  Ohterwise, why let the free market determine winners and losers?  That said, when foreign countries are manipulating markets like with the 73 embargo, there is a place for government intervention/action.  Of course Sunset provisions should be manadatory with such responsive actions. 

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