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The Scariest Number For The Oil Industry: $550 Billion

Just over half a trillion dollars: that's how much cash oil industry companies will need to repay in maturing debt over the next 5 years.

Specifically, according to BMI Research cited by Bloomberg, there is $72 billion in oil-related debt maturing this year, $85 billion in 2016 and $129 billion in 2017, and a total of $550 billion in bonds and loans through 2020.

This is a problem because while paying annual interest is one thing and easily manageable, rolling over debt when it is yielding over 10% - as is the case for over 168 global companies, or triple last year's number - is virtually impossible. It is an even bigger problem when considering the recent surge in energy company net debt/EBITDA (shown below in red) which has recently hit an all time high, surpassing the oil sector crisis of 1999, dragging energy sector credit risk and spreads with it to all time highs.

 

In fact, unless oil soars higher and miraculously concludes a second dead cat bounce, there will be hundreds of companies which are simply unable to refinance, and have no choice but to default. Considering that 20% of total debt due in 2015 belongs to US drillers (with Chinese companies coming in second with 12%), what was until last week perceived a junk bond crisis, and has been largely forgotten this week following the artificial, central-bank inspired price-action euphoria when in reality absolutely nothing has changed on the cash flow scene, expect the hangover of the post month-end window dressing orgy to come down like a ton of bricks.

The reason: fundamentals continue to go from bad to worse, and its not just the fwd P/E chart we won't tire of showing...

... as Bloomberg adds, some earnings metrics are already breaching the lows of the 2008 financial crisis. The profit margin for the 108-member MSCI World Energy Sector Index, which includes Exxon Mobil Corp. and Chevron Corp., is the lowest since at least 1995, the earliest for when data is available.

“There are several credits which simply won’t be able to refinance and extend maturities and they may need to raise additional equity,” said Eirik Rohmesmo, a credit analyst at Clarksons Platou Securities AS in Oslo. “The question is: would they be able to do that with debt at these levels?”

The answer is no, as we showed ten days ago.

It gets worse:

Some U.S. producers gained breathing space by leveraging their low-cost assets to raise funds earlier this year and repay debt, Goldman Sachs Group Inc. wrote in a Aug. 6 report. This helped companies shore up their capital and reduce debt-servicing costs.

 

That may no longer be an option because energy companies have been the worst performers in the past year among 10 industry groups in the MSCI World Index.

 

Credit-rating downgrades are putting additional strain on the ability of oil companies to raise money cheaply. Standard & Poor’s cut the rating of Eni SpA, Italy’s biggest oil company, in April, while Moody’s Investors Service downgraded Tullow Oil Plc’s debt in March.
Spokesmen for Eni and Tullow declined to comment.

It is the small companies who will face the creditor firing squad first:

“Clearly, those companies with debt to pay will have one eye firmly on oil prices,” said Christopher Haines, a senior oil and gas analyst at BMI in London. “With revenues collapsing and debt soon to mature, a growing number of companies may find themselves unable to meet repayment schedules.”

The only loophole: if oil somehow does rebound to $60 or above, which absent a Saudi collapse or a Chinese recovery, will not happen for a while. If not, the current period of calm, where companies are racing for the producing bottom, will very soon come to an end as will the disposable cash of the energy industry. At that point the administration will have to make a choice: bail out the energy sector or reap the consequences.