The Strategist

Energy Giants - Raising Debts Amidst Oil price Collapse

03/23/2015 - 18:29

The world’s top energy groups have raised large amount of debts this year.

Energy Giants - Raising Debts Amidst Oil price Collapse
World’ top energy groups are persistently raising debts this year, thereby deriving benefits from the ultra-low interest rates to meet cash shortfalls led by oil price collapse. According to Morgan Stanley research, the world’s leading oil companies have reported a record high $31 billion of debt raised during the first two months of 2015. The debt raised by biggest oil companies of Europe and the US including, Exxon Mobil, BP, Chevron and Statoil accounted for nearly 48% out of the total debt of $63 billion for the first 2 months of 2015. The debt mounted more than 60%, as compared to the last quarter of 2014. It further outpaced the earlier quarterly record achieved 6 years ago, following the last oil price downfall. The surprising sink in oil prices since June 2014 has completely shaken oil companies and forced them to slash their capital spending plans and even sell out assets to pay dividends and sustain their balance sheets.
The increasing dominance of oil giants clearly indicates the mounting difficulties witnessed by smaller companies that are required to pay higher borrowing costs. All these circumstance are making weakened small oil companies highly vulnerable to take overs. According to analysts, the surge in mergers and acquisitions across the sector will make the interest rates highly competitive and affordable for the oil companies.

Except, Eni an Italian integrated oil & gas company that have stated dividend cut this year, majority of large companies have promised to maintain dividend payouts to their investors. The oil majors are able to borrow huge amount of debts which is a clear indication of investor’s high confidence upon the financial strength as well as the revenue diversification strategies ranging from refining to measures adopted to withstand the price collapse, in contrast to small and largely indebted companies. But, if the crude oil price slides further or stays at current low levels over a longer period of time, the major oil companies are expected to succumb under the pressure.

According to analysts, Exxon issued the highest debts of about $8 billion in 2015 so far, followed by Pemex with $6.6 billion and Rosneft, Russian oil producer with $6.3 billion. While, the other majors including Total, Chevron and BP issued $6 billion debt each.

The oil & gas sector landscape has dramatically modified. The outlook of the industry is completely different to what it was a couple of year back, when the oil industry fundamentals were controlled by the cartel. Earlier traditional industry structure of oil & gas has undergone surprising transformation marked by supply glut and declining demand growth.

Given the low revenues, major oil companies are in essential need of funds to break even. And the remarkable low interest rates in European as well as the US markets have facilitated the oil giants to borrow debt at low rates. However, the companies are likely to continue raising debts for potential acquisitions in oil & gas sector which is expected to increase its pace in the latter half of the year.

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