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The Scariest Number For The Oil Industry: $550 Billion
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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No problem. 550/$25 barrel = 22 billion barrels. Of course, then there are operating costs. Can we outsource oil rig work to Bangladesh?
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....
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.
Gas goes up a 5 bucks a gallon...problem solved....next...
The Fed will buy their debt.
The Fed loves having questionable debt on their balance sheet.
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.
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.
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.
That's not the scariest number for the oil industry, that's the scariest number for the people holding those debts......
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
Here are some more signs of a recession.
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record...
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/
http://www.zerohedge.com/news/2015-07-27/when-will-we-ever-learn/
Here is how to respond.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
Step aside spammer, Jim Willie gives yet another great interview.
https://www.perpetualassets.com/news/2015/08/27/we-are-at-war/
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
jim has been sipping the kool aid, kinda says alot about these folks, off the deep edge.
Just take it from executive bonuses, problem solved!
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_UqAW0hooligan2009,
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%
The banks will own the reserves by then.
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.
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.
Then they better get to drilling, huh?
My Ford F-350 duelly was repossessed.
550 Billion?
Wall Street must be involved somehow.
It's not the loneliest number that you'll ever hear.
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5 years is a long time, the whole industry could rebound by then.
But but, the recent US shale boom and fracking industry was SUCH a success that this surely is peanuts, right ?
/s
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.
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!
One other thing. Reserves will have to be repriced.
So, the collateral for the loans is the equipment and mineral rights?
Banks win again.
XTO looks pretty cheap next to 550B
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.
You mean its smaller then the student loan crisis?
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.
You're fracking kidding me!!!! lol
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.