by Christopher Adams at FT.com
The world’s biggest energy groups have sold record amounts of debt this year, taking advantage of historically low interest rates to plug cash shortfalls with borrowing, after a 50 per cent plunge in oil prices.
The total debt raised in the first two months of 2015 by large US and European oil and gas companies has jumped by more than 60 per cent from the final three months of 2014. It outstrips the previous quarterly record set six years ago after the last price collapse, Morgan Stanley research shows.
Sales by half a dozen of these companies, which include multibillion dollar bond offerings from ExxonMobil, Chevron, Total and BP, reached $31bn in January and February, accounting for almost half the $63bn raised by oil and gas groups globally.
The dominance of the majors also reflects the increasing difficulties faced by the smaller oil explorers, whose borrowing costs are rising. Gulf Keystone recently put itself up for sale and EnQuest had to renegotiate its banking covenants.
Martijn Rats, analyst at the US bank, says some of the so-called oil “majors” could be preparing the ground for acquisitions, borrowing now to be able to act quickly should smaller, weakened groups become vulnerable to take over.
Mr Rats said that mergers and acquisitions could pick up as early as the second half of this year: “As a result, it would seem reasonable for integrated oil companies to lock in extremely competitive rates of financing,” he said.
Another reason for the high levels of issuance is that debt remains a relatively cheap way to cover spending on big projects and fund dividends as cash flow dwindles due to lower prices.
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Apart from Italy’s Eni, which has said it will cut its dividend this year, most of the big groups have vowed to protect payouts to investors. They are also pressing suppliers to cut costs, delaying projects and selling assets.
“If you see a protracted period of lower oil prices ahead, you will probably think that it takes a while for cost deflation to come through and restore cash flow, so the first thing you can do is use the balance sheet to borrow money to plug that gap,” said Mr Rats.
The majors have made up a much larger share of overall oil and gas debt issuance, accounting for 48 per cent of such fundraising this year, up from 30 per cent in the last three months of 2014. By contrast, the share of state-owned oil companies has fallen to just 22 per cent from 35 per cent in the first quarter of last year.
Exxon has issued the most debt this year, raising $8bn, followed by Mexico’s Pemex with $6.6bn and state-owned Russian producer Rosneft with $6.3bn. The other top ten issuers are majors or exploration and production groups.
The fact that the largest have been able to raise so much reflects investors’ confidence that they have the financial strength and diverse revenue streams, for example from refining, to weather the price collapse, in contrast to some of the smaller and more highly indebted companies in the industry.
The perception of the majors could change if oil falls further or stays at current lows for a number of years, and their strong investment grade credit ratings come under pressure.