The Strategist

Deloitte: 30% of US Energy Companies Are Bankrupts

02/17/2016 - 14:42

US energy sector is on the verge of collapse. In its latest report, Deloitte predicts that about a third of US oil companies may declare bankruptcy this year.
A case in point is, of course, not about the industry giants, but high-risk companies that have emerged during the shale revolution. Due to the fall in oil prices, they have lost the ability to generate necessary cash flow, while reducing the debt burden is also not possible.

In fact, they are doomed, at least with current oil prices.

Deloitte report is based on an analysis of more than 500 public companies engaged in mining and exploration of oil and gas around the world. The document notes that the fall in oil prices to lows for the past 10 years, is resulting in a reduction of profits and is forcing companies to cut budgets and lay off thousands of employees.
"95% of the oil companies can produce oil at cost less than $ 15 per barrel, which is result of cost reductions and technological innovations that have been developed since the middle of 2014, when only 65% of companies could produce at such cost.

Nevertheless, it is too low for some companies. "

Around 175 companies are on the verge of bankruptcy; their total debt load is about $ 150 billion. Since value of their shares is constantly decreasing, even sale of assets is no longer able to attract sufficient funds to sustain life.

In addition, if earlier the companies, albeit at a high rate, could attract financing through the issuance of bonds, now this possibility no longer exists. Banks are well aware how risky investments in debt securities of such companies are, and are trying to avoid them in every way.

The most obvious example of this is the dynamics of yields on US energy sector bonds. Now the risks are at a record level.

"2016 is the year of difficult decisions when the situation reaches a critical point", - said John England, vice chairman of Deloitte.

Deloitte also notes that only 14 of 53 energy companies that have gone bankrupt in the last quarter, were service providers.

This, apparently, is obliged to higher capital costs and thus higher debt from mining companies, the company’s material said.

They involve less capital in their business, so they are more financially flexible. However, Deloitte’s analysts believe that soon they will not be able to deal with the crisis.

By the way, along with Deloitte, other companies also assessed the US energy sector. Their analysts are also expecting 30% of the companies to go bankrupt this year. According to estimates of consulting company Alix Partners, all of the major deposits of shale oil in the US are unprofitable at oil price of $ 30, so that the conclusions suggest themselves.

In its report, Alix Partners predicts drop in profits of oil and gas companies in the US and Canada in 2016 by 20-30% as compared with the 2015.