U.S. OIL DEBT UP
Results from second-quarter 2015 financial statements of a number of U.S. companies with onshore oil operations suggest continued financial strain for some companies. Low oil prices have significantly reduced cash flow for U.S. oil producers, and to adjust to lower cash flows, companies have reduced capital expenditures and raised more cash from debt and equity.
Because of the large amount of debt accumulated from past years, a higher percentage of operating cash flow is being devoted to servicing debt. Debt service payments consist of principal repayment to creditors and typically are fixed in both amount and frequency, agreed upon before a company receives a bank loan or issues a bond.
Some companies have been able to refinance their debt—that is, paying off old debt and taking on new debt, perhaps with a different interest rate or longer maturity. This option has increasingly become more expensive, because interest rates for energy company debt issuance have risen as crude oil prices declined, and rates are now higher than for any other business sector. The spread for energy company bond yields with a credit rating below investment grade averaged 11 percentage points above the risk-free rate since August, indicating higher interest rates for energy companies.
With fixed debt repayments and the large reduction in cash from operations for these companies, the ratio of debt repayments to operating cash flow has increased recently. For the previous four quarters from July 1, 2014 to June 30, 2015, 83% of these companies' operating cash was being devoted to debt repayments, the highest since at least 2012. As the share of debt repayment to operating cash flow increases, a company is left with less cash to use for investment opportunities, dividends, or savings for future use.
Companies that use bank credit facilities to meet their short-term cash requirements face redeterminations twice a year. With next month's round of redeterminations—which considers the valuation of companies' reserves as collateral—some companies may face challenges in raising enough cash to maintain capital expenditures and meet liabilities.
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AN - China National Offshore Oil Corp. (CNOOC) is willing to invest $3 billion in its existing oil and gas operation in Nigeria, the Nigerian National Petroleum Corporation (NNPC) said on Sunday following a meeting with the Chinese in Abuja.
REUTERS - Production at Libya’s giant Sharara oil field was expected to fall by at least 160,000 barrels per day (bpd) on Saturday after two staff were abducted in an attack by an unknown group, the National Oil Corporation (NOC) said.
IMF - Output grew by 3.8 percent in 2017, underpinned by a resilient non-hydrocarbon sector, with robust implementation of GCC-funded projects as well as strong activity in the financial, hospitality, and education sectors. The banking system remains stable with large capital buffers. Growth is projected to decelerate over the medium term.
IMF - Higher oil prices and short-term portfolio inflows have provided relief from external and fiscal pressures but the recovery remains challenging. Inflation declined to its lowest level in more than two years. Real GDP expanded by 2 percent in the first quarter of 2018 compared to the first quarter of last year. However, activity in the non-oil non-agricultural sector remains weak as lower purchasing power weighs on consumer demand and as credit risk continues to limit bank lending.