Concerns surrounding near-term financial risks for US independent oil and gas firms are exaggerated, Â a recent report by Wood Mackenzie has found.
The high-growth business models of the US independents are being tested by low oil prices and tougher access to capital.
However, larger producers – which, along with the majors of the likes of BP, Chevron, etc., account for the majority of upstream investment and production – have the required flexibility to tide them through the near term at the very least, the analyst said.
Fraser McKay, corporate analysis research director for Wood Mackenzie explains: “Most companies in the peer group have rising absolute debt levels, and October’s RBL redeterminations have been latched onto as a potential catalyst for sector implosion. But at least two thirds of Lower 48 production is attributable to companies with no RBL exposure at all, or have no redeterminations until 2016.”
Of those larger producers with near-term debt redeterminations, Wood Mackenzie estimates most can accommodate a borrowing-base cut of over 50% before their situation becomes imminently critical.
McKay adds: “We anticipate discomfort in the coming months and expect some more companies will inevitably fail, which is clearly a catastrophic event for lenders and equity holders. However, most of these companies will be small, with pre-existing structural portfolio issues.
“Even in the worst case scenario, the assets of these companies will be salvaged through restructuring or assets sales; creditors will keep wells producing as long as possible. The strategic actions and cash flow neutrality goals of the largest producers in the sector will have a far greater impact on capital spend and therefore supply.”
However, concerns regarding the roll-off of hedging protection are justified, the analyst SAID. For the top 26 US independents, Wood Mackenzie estimates cash flow from hedging will fall from $9.1bn in 2015 to $2.2bn in 2016.
“The most financially-stretched operators may be forced to enter into unattractive hedges, just to guarantee debt repayment and satisfy lender conditions” McKay noted.Â