Mining, energy firms in trouble as oil price slides; fears of bankruptcies unless commodity recovers
The United States became the world's biggest oil and gas producer last year thanks to the shale revolution.
- Oil and gas explorers hit hard by oil price slide, with 35pc filing for bankruptcy in 18 months
- Fears more could go under if price does not recover
- Oil prices fell to below $US30 this year
- Experts tip price to go lower, before recovering to $US50 later this year
But as oil prices slid from above $US100 in 2014 to below $US30 this year, energy firms that borrowed heavily to expand are in trouble.
According to Deloitte, 35 oil and gas explorers in the US filed for bankruptcy from July 2014 to December 2015.
It predicted 35 per cent of oil and explorers globally — 175 companies — could go under in 2016 unless the oil price recovers.
The 70 per cent plunge in oil prices since 2014 because of oversupply has not just hurt oil firms and oil exporters, but banks and bond investors who lent trillions of dollars to fund oil projects, sparking fears of another financial crisis.
Global regulator, the Bank for International Settlements, said last month the global oil and gas industry owed $US3 trillion to banks and bond investors in 2014, a figure which has nearly tripled since 2006.
BIS general manager Jaime Caruana said in a speech that a substantial portion of the money was borrowed by state-owned oil firms from emerging market economies like Russia, Brazil and China.
Professor Fariborz Moshirian, from the Institute of Global Finance at the University of New South Wales, said the fall in the price of oil had hit the energy industry.
"The exposure of oil and gas companies to debt is substantial given the fact the price of oil has substantially declined and they are not in a position to service their massive debt," Professor Moshirian said.
Mining, energy firms at forefront of global defaults: S&P
Credit ratings agency Standard & Poor's cut the investment ranking of dozens of oil and gas firms around the world, including in the US, after it reduced its forecast for oil to $US40 a barrel in 2016.
Terry Chan, S&P's head of Asia Pacific corporate research, said mining and energy firms were at the forefront of global defaults so far this year.
"The drop in oil price has obviously been quite shocking to a lot of the small players," Mr Chan said.
"A lot of smaller players, for example in the US, actually got in at much higher levels.
"Hence we have a lot of stress in the US energy sector."
S&P said troubled oil and gas firms made up one-third of companies in the US facing bankruptcy, which had pushed up its distressed debt ratio to the highest since July 2009.
It said oil and gas companies accounted for 156 of 524 companies considered to be in trouble as measured by its distressed debt monitor, the largest number of any sector.
Some major US banks have increased their provisions for possible loan losses from the oil and gas sector.
Mr Chan said S&P had downgraded several regional banks in the US because of their exposure to the oil industry, including BOK Financial Group and Comerica.
"We have downgraded oil companies in the US and Europe due to the impact and obviously this has a contagion effect on banks exposed to oil and gas and energy," Mr Chan said.
'Lots of people will suffer'
Dr Fereidun Fesharaki, who runs global oil and gas consultancy FGE, has advised both the US and Iranian governments on energy policy and said he expected a shakeup in the oil and gas industry as higher-cost producers go under.
"There are lots of people who will go out of business, lots of people will suffer," he said.
Major oil exporters have also been hit by low oil prices.
We have much more negative outlooks than previously. The distress ratio is up, the downgrade ratio is up, the defaults are up.Terry Chan, S&P
Saudi Arabia has burned through cash running a budget deficit as it tries to ride out the slump.
The country is among a number of oil exporters who have just been downgraded by S&P.
Brazil, already in recession, is also facing higher borrowing costs after having its credit ratings cut as well.
Dr Fesharaki said Brazil's state oil firm Petrobras was in trouble with $US24 billion in bond repayments alone due in 2016 and 2017.
"I don't know how you can pay $US24 billion in debt," he said.
"You have to restructure.
"I personally hold some of their bonds so I'm not worried."
Borrowing costs for oil 'skyrocket'
The Bank for International Settlements said borrowing costs for oil firms have skyrocketed, especially in the US and emerging markets.
Mr Caruana said credit spreads on high-return energy bonds had widened from 3.3 per cent in June 2014 to more than 16 per cent recently.
Professor Moshirian said part of the problem was that rising US interest rates had increased borrowing costs.
"The cost of … operations has increased due to to the fact they borrowed in US dollars and now they have to pay more for their debt while they are facing substantial reduction in the price of oil," he said.
When Greece could not repay its loans, that triggered the European debt crisis.
In recent weeks, global markets have been shaken by fears about the banking industry's exposure to the oil and gas industry.
Mr Chan said he expected more downgrades and defaults in 2016.
"I wouldn't put it that far in terms of as bad as the GFC but certainly is it a bleak year," he said.
"We have much more negative outlooks than previously.
"The distress ratio is up, the downgrade ratio is up, the defaults are up."
Oil prices could rise to $US50 by year's end: expert
Dr Fesharaki dismissed fears of a financial crisis led by commodities.
He predicted oil prices could fall to around $US25 in March, before rising to around $US50 by the end of the year.
"People worry that low oil prices will make the global market unstuck," he said.
"I think once the prices are in the $US50 to $US60 range, a lot of these fears will disappear.
"People will pay their debts.
"But what will go out will be those who should have never come in."
But he told an Australian Institute of Energy function last week a global recession or a war in the Middle East would change his forecasts.
Professor Moshirian said if oil prices remained low, global growth could weaken because of deflation and lower revenue for major oil exporters.
"If the price of oil continues on with the current level or goes down to $US20 or $US10 a barrel, that could affect the overall health of a number of economies," he said.
Source: ABC News