In the US, oil executives have learned from their experience of previous price swings and many have hedged prices. In a sample by McKinsey of 25 US exploration-and-production (E&P) companies, around 30 per cent of production was hedged through 2015, and about 15 percent was hedged through 2016. This gives time to wait out the cycle. The $400 billion in cancelled projects and other cuts in capital investment will also help many stay afloat. For their part, investors have proved willing to bet that prices will not stay low forever and have injected both debt and equity into the sector.
There has been a great deal of bottom-fishing, particularly from private equity. Between November 2014 and September 2015, North American E&P companies issued more than $23 billion in equity and an estimated $20 billion of asset sales has been injected in the system over the same period, according to Oil & Gas Financial Journal. That said, there are only so many tools in the kit and most have been used. Debt in many energy companies is trading below par and prolonged low prices will certainly begin to drive some players into bankruptcy sooner rather than later.
At $40 a barrel, the US industry doesn’t work Steven Woods of Moodys told the Financial Times. Companies can’t earn an adequate return on capital. Those with weak balance sheets are vulnerable and a number have either missed payments or publicly been warned of bankruptcy.
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