Debt-Laden Oil and Gas Industry Likely to Face Continued Financial Struggles, According to March ABI Journal Article
Alexandria, Va. — While plummeting energy prices are proving to be a financial respite for millions of U.S. households, they are wreaking havoc on American oil and gas companies and the industries that support them, according to the lead article in the March edition of the ABI Journal. “Suffice it to say that virtually nobody saw this coming a year ago, and the U.S. energy sector is now scrambling to respond in an appropriate way,” Chuck Carroll and John Yozzo of FTI Consulting Inc. write in “The New Energy Crisis: Too Much of a Good Thing (Debt, That Is).”
Though there have been breakthroughs that enable firms to locate and extract unconventional energy reserves, these reserves do not come to the surface cheaply, according to the authors. “The collapse of global oil prices since late 2014 has suddenly made the economics of shale oil and other unconventional energy sources much less attractive,” Carroll and Yozzo write. The authors attribute the downturn in late 2014 to the November 2014 announcement of the Organization of the Petroleum Exporting Countries (OPEC) that it intended to maintain it's one-third market share of the global oil supply irrespective of market prices. This strategy drove oil prices down steeply and has inflicted financial pain on “tight oil” production and exploration.
“Much of this tight oil development has been debt financed thanks to corporate credit markets' huge risk tolerance and appetite for higher returns since 2011 in an environment of historically low interest rates,” Carroll and Yozzo write. Total debt associated with the oil and gas exploration and production (E&P) industry tops $285 billion, compared to $125 billion in 2007, according to the authors. “A tripwire that lies ahead for many E&Ps is the industry's reliance on reserve-based revolving credit facilities from bank lenders, the mechanics of which potentially reduce a borrower's access to capital at a most inopportune time.”
The current financial struggles of the debt-heavy oil and gas industry could have far-reaching implications for other sectors that derive a fair portion of their orders from the energy sector. One sector in particular, the steel industry, has already begun announcing job cuts, according to Carroll and Yozzo. This is a “stunning turnabout even for an industry that has long been famous for its boom-and-bust cycles.”
As for how long the current downturn may last for the oil and gas industry, Carroll and Yozzo are not optimistic. “We have no crystal ball, but the collective wisdom of financial markets tells us that it is going to be a long year for the energy sector.”
To obtain a copy of “The New Energy Crisis: Too Much of a Good Thing (Debt, That Is),” published in the March issue of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at firstname.lastname@example.org.
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