Volatile oil and gas prices are fueling major worries about access to credit and capital for CFOs in the oil and gas industry.
According to the BDO Seidman Natural Resources 2009 Outlook Survey, 57 percent of the100 U.S. oil and gas exploration and production company CFOs questioned said that “credit capacity restraints, including access to capital” will be their company’s greatest financial challenge in 2009. Access to capital was also the top barrier they saw to international growth.
While only 21 percent of finance chiefs said that the decreasing price of oil or natural gas was their company’s biggest challenge, the plunge since July in crude prices, from $147 a barrel to around $46, directly affects the credit lines of oil and gas companies.
It is common practice for oil and gas companies to structure banking arrangements around a borrowing base tied to the value of the company’s oil and gas reserves, says Charles Dewhurst, partner and national energy industry practice leader at accounting and consulting firm BDO Seidman LLP. Since oil and gas reserves estimates are based on the current price of oil, if the price drops when a company is due for its periodic re-estimation of reserves its credit lines will be tightened.
“Banks will issue rates on the current prices so there will be a significant ratcheting down in the credit line for each oil company based on the declining value of their reserves,” says Dewhurst.
In addition, the economy in general has CFOs down. Seventy-two percent of oil and gas exploration company finance chiefs reporting they’re convinced that the economic crisis will hinder ability to extend bank debt or borrow money in 2009.
In the past year, 26 percent of the companies responding said they had significant delays or termination in exploration projects, 80 percent of which were due to lack of capital to fund the project. The dramatic drop in oil prices will only increase project delays and cancellations in 2009, says Dewhurst, when companies will find it difficult to obtain needed capital.
Oil and gas companies that have continuously maintained close relationships with banks by keeping them updated on their financing needs may find it easier to refinance using different terms. However, if an oil and gas company’s only option is to look to other lenders, “the reality is that in today’s credit market there are just not going to be that many choices,” says Dewhurst.
One bright side for the oil and gas exploration industry is that it may be good for its employees. Since many of the contracts signed in 2008 are for long term projects, CFOs don’t expect to see a decrease in field staff levels in 2009. Only eight percent expect to decrease field staff at their companies, compared to 29 percent who expect to increase staff and 63 percent who aren’t making any changes. Less than 15 percent of CFOs reported employee recruiting and retention as a major financial challenge in 2009.