29 February 201, Abuja – Indigenous oil companies that acquired the divested interests of Shell, Total and Chevron in Nigeria, between 2013 and 2015 are at r isk of going bankrupt and may find it difficult to repay the loans they borrowed from financial institutions to acquire these assets, thereby putting the banks in dire straits also.
According to a report in Forbes, most of these deals were consummated during the period when crude oil was selling for about $100 per barrel, meaning that these firms would be faced with serious challenges in meeting their financial obligations to their lenders now that crude oil is selling around $30 per barrel.
The companies, mostly affected are Newcross Exploration and Production Limited, First Exploration and Petroleum Development Company, Seplat and Aiteo Group. The report stated that oil companies that are particularly at risk of default are those that raised debt financing in 2014 to buy shares in Shell’s Oil Mining Leases (OMLs) 18, 24, 25 and 29.
According to the report, at the time the acquisition deals were concluded for these assets, oil prices soared above $110 a barrel and local banks— less risk-adverse than their international counterparts – readily lent on a price basis of about $80-$90 per barrel.
It further stated that Nigerian banks’ ability to maintain the lines of credit in place is now under question, given their exposure to the sector and also considering the rising cost of US dollar-denominated funding, adding that write-offs seem unlikely right now.
The report said: “The nation’s indigenous firms that rose to prominence to purchase oil fields from supermajors, such as Chevron, Shell and Total, are now in deep distress. The billions of debt they raised for these acquisitions risk going unpaid with oil revenues a fraction of 2013 levels. The scramble to prevent firms such as Aiteo and Newcross from defaulting has begun. And with some banks looking to leave loan syndicates, the market is welcoming the arrival of new entrants – commodity traders. “But with oil now hovering around $30 a barrel, and showing little signs of recovering, how effective can restructuring measures be?“
Commenting on the development, Amaechi Nsofor, a director at Grant Thornton, said close to 100 per cent of the indigenous oil and gas companies needed funding of some sort, either to meet debt repayments or fund significant field development capital expenditure.
A banker, who does not want his name in print said: “Although when the drop in prices is this dramatic, new loan agreements are almost impossible. There is only so much oil a company can pledge with current prices.” Another banker, however, stated that “the last thing you want to do as a lender is to enforce. If there is still some cash flow, then you would rather restructure.”
The report explained that restructurings will take the form of amend-and-extend exercises through covenant readjustments and extension of debt maturities, adding that pushing things down the road in order to trade out of the situation until the oil price returns seemed to be the most viable option for both oil producers and banks.
The Forbes report further stated that over recent months, commodities traders such as Glencore, Mercuria and Shell Trading have been looking to participate in refinancing and restructuring deals, providing a new life-line to the market. The report said traders have much-needed US dollar liquidity, and were, therefore, welcomed by distressed borrowers and over-exposed lenders.