While the number of oil and gas companies filing for bankruptcy continues, big oil companies continue to borrow money from the banks to stay afloat. Four of the major oil companies have raised$37 billion off of bond sales this year, almost double the amount issued in the time before oil prices plummeted. While there have been negative effects, the low debt costs are helping the companies.
Exxon Mobil, Royal Dutch Shell, Chevron, Total SA, BP, and Eni SpA are some the biggest players adding to the massive debt totals accrued by oil gas companies during this slump. Along with Anadarko, ConocoPhillips, and a handful of other sizeable companies, the majors have raked up over $35 billion in debt this year alone. Meanwhile, smaller companies are drowning in debt, forcing nearly 70 chapter 11 bankruptcy filings in the past couple of years.
The majors however have been dealt a softer blow, as the US witnesses the lowest debt costs in years despite the credit-rating downgrades and economic woes. “They’re making hay while the sun shines,” explained Alex Griffiths, managing director at the London headquartered Fitch Ratings Inc. “Treasurers are making use of good market conditions to maintain liquidity buffers.”
It appears the key to the survival of the oil giants is low historically low borrowing rate. Current rates require a return of 3.09 percent to hold dollar-denominated debt of companies with an investment-grade rating, according to data from Bank of America. On another front, premiums for credit default swaps for the major US oil and gas companies have plummeted over the past five years.
Shell sold around $1.5 billion of five-year bonds in May alone at a projected yield of 1.99 percent. Coupled with the huge bonds sales, Shell’s net borrowing has increased to about $70 billion, while the company’s gearing has risen to 26 percent, up 10 percent compared to last year. Other majors have heard the same tune of borrowing played over and over again. BP sold $1.25 billion worth of 10-year bonds last month, but with a higher yield of 3.12 percent. Although not as high, BP’s gearing was 24 percent at the end of the last quarter.
Jon Clark, leader for oil and gas transaction-advisory services at Ernst and Young put it succinctly, stating, “the majors still have strong balance sheets to raise debt at competitive rates so they can manage their capital agenda, for example, to maintain dividends and strategic capital investments.” Clark went on to point out that this downturn might even prove beneficial in some aspects, giving the major’s an opportunity to refinance more expensive debt.