Crude Slump Sees Oil Majors' Debt Burden Double to $138B

Crude Slump Sees Oil Majors' Debt Burden Double to $138B
When commodity prices crashed in late 2014, oil executives could look at their mining counterparts with a sense of superiority.

(Bloomberg) -- When commodity prices crashed in late 2014, oil executives could look at their mining counterparts with a sense of superiority.

Back then, the world’s biggest oil companies enjoyed relatively strong balance sheets, with little borrowing relative to the value of their assets. Miners entered the slump in a very different state and some of the world’s largest -- Rio Tinto Plc, Anglo American Plc and Glencore Plc -- had to reduce dividends and employ draconian spending cuts to bring their debt under control.

Two years on, you could excuse mining executives for feeling smug. As crude trades well below $50 a barrel, Exxon Mobil Corp., Royal Dutch Shell Plc and other oil giants have seen their debt double to a combined $138 billion, spurring concerns they’ll need to keep slashing capital spending and that dividend cuts may eventually be necessary.

Worse, the mountain of debt, which has grown tenfold since 2008, is likely to increase further in the third and fourth quarters, executives and analysts said.

"On the debt, it may go up before it comes back down,” Shell Chief Financial Officer Simon Henry told investors last week. “And the major factor is the oil price.”

The problem for Big Oil is simple: Companies are spending a lot more than they’re earning. Both West Texas Intermediate and Brent crude, the two most prominent benchmark grades, slid into bear markets this week after falling more than 20 percent since early June.

The first-half results indicate that oil companies “are likely to generate large negative free cash flows for the full year,” said Dmitry Marichenko, an associate director at Fitch Ratings in London. 

Take Chevron Corp. In the first half of the year, it generated $3.7 billion pumping crude, refining it and selling gasoline and other products. But that wasn’t enough to cover the $4 billion it paid to shareholders over the same period, let alone the $10 billion it invested in projects. Although Chevron tried to close the gap by selling $1.4 billion worth of assets, it still had to take on $6.5 billion in new debt over six months.

The imbalance explains why the debt load has grown so quickly over the last decade. Before oil prices plunged in mid-2014, Big Oil had around $71 billion in net debt, up from a low of just $13 billion in mid-2008, when oil prices hit a record high of nearly $150.

Growing Debt

Debt levels are currently rising at an annual rate of 11.5 percent, more than double the 5.1 percent witnessed between 2009 and 2014, said Virendra Chauhan, an oil analyst at consulting firm Energy Aspects Ltd. in Singapore.

“Whilst credit markets have been expansive and accessible during this time period, investor concerns about the sustainability of this trend are valid,” he said.

For some oil bosses, including Shell Chief Executive Officer Ben Van Beurden, reducing debt is now the main priority, ahead of paying shareholders dividends and investing in new projects. His company’s debt has risen especially fast after borrowing to finance the $54 billion acquisition of gas producer BG Group Plc earlier this year.

Yet, the oil companies have been able to take on more debt fairly easily because ultra-low interest rates allow added borrowing without risking credit rating downgrades.

BP CEO Bob Dudley said the British company could “actually manage a little bit more” debt. “Money is so cheap right now,” he said.


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Philippe  |  August 06, 2016
Why do analyst don’t understand that the debt load on majors are high? First, it is high with respect to earning, since the Bent and WTI are 50% of the 2014 value, the percent debt load will be much higher. The majority of these loans were made prior 2014 with the crude oil price above $80/$120. These were the market conditions than. Most majors finances their project on the prevalent rate plus one or two percent. They are variable rates. The debt load is high but the payments are lower because the interest is lower. Many majors pay off the loan first and do not take a profit until the loans are paid off. This permits the majors to take a loss when declaring their income taxes. The majors amortize the loans over the average O&G market cycle, which is 5 years, give or take a couple of years. The chances are that all loans taken in 2011 are, more or less, paid off. Loans taken in 2014 have another 3 years to be paid off. By 2019 the consensus is that crude oil price should be $80/$100 per barrel. To state that the majors have a growing debt is aberrant. So the same analysts will say in 2 years that the majors are lean and clean. Presently in year 2 of this crash, the like of XOM will survive and bounce back as it always has. Those that will not survive are the EPs that borrowed near 100% of their capital; those are small players without a long term vision of this O&G market.