With the bi-annual review of U.S. shale producers’ financials underway, a potential credit line shrink may be felt by many small-to-midsize companies in the oil and gas sector. According to Haynes and Boone LLP, almost 80 percent of oil and natural gas producers will see a reduction in the amount they can borrow, with the average credit line cut being almost 40%. These expected cuts are likely in reaction to the fall in oil prices since the last review. The positive side of low oil prices is that the cost of fueling the drilling operations is down compared to when prices were high. However, to reduce their risk, many lenders will decrease credit lines when prices fall. This is because in many instances, banks have rights to assets if a company files bankruptcy, and the amount of the loan is related to how much the producer’s acreage is worth. What remains unknown is if we will see an increase in financially sound companies and large investment capital houses moving in on some of the highly indebted companies to turn a profit.
U.S. GDP data was released this morning with stronger U.S. economic data driving higher oil prices and a stronger stock market. The gains strengthened after U.S. government data showed the economy expanded at a higher than expected rate of 3.9 percent in Q2, due to greater consumer spending and construction. This strength is in contrast to the longer-term forecast for the energy markets to remain weak due to the oversupply of oil and uncertainty in Asia.
Despite ongoing volatility, prices are stuck within a range, illustrated on the graph below.