By WILLIAM WATTS at Marketwatch
Times are tough for U.S. shale-oil producers—and the situation could get even tougher next month when lenders are set to reassess oil-and-gas loans.
The pressure isn’t a shock given the sharp drop in oil prices CLV5, -5.22% since mid-2014. Throw in already high debt levels for U.S. onshore oil producers, who leveraged up to ramp up production as oil prices soared, and the recipe is complete for a squeeze. The chart below from the U.S. Energy Information Administration, based on second-quarter results from 44 companies, illustrates the growing chunk of cash flow that goes to servicing debt.
From July 1, 2014, to June 30, 2015, 83% of the companies’ operating cash was devoted to debt repayments—the highest since at least 2012, the EIA found. Read the EIA report here.
The agency noted that some companies have managed to refinance their debt, but that maneuver has become increasingly expensive since interest rates for debt issued by energy companies have been on the rise as oil prices have declined. The spread energy companies have to pay to borrow in the high-yield bond market are wider than for any other business sector (see chart below).
Read: Oil price drop keeps junk bond stress at five-year high
Meanwhile, companies that rely on bank credit to meet short-term cash needs typically go through a reassessment—or “redetermination”— process twice a year. This is when banks reassess the value of the borrower’s oil wells and other assets. As explained by analysts at Bank of America Merrill Lynch in a note last week:
If the value of the assets has fallen below the drawn amount of credit at the time of redetermination, the company will need to make up the shortfall, known as the borrowing-base deficit. Therefore, the longer oil stays at depressed levels, the harder it