Oil companies in danger

US, WASHINGTON (ORDO NEWS) — Due to a quarrel between Russia and Saudi Arabia, the fragile OPEC + alliance collapsed last week, and with it an agreement to limit oil production. And this is when world demand already got into a tailspin because of the coronavirus, writes The Times, UK.

Many will rejoice at lower prices for gasoline and other fuels. However, oil companies and firms related to them will face a series of legal proceedings in the coming weeks.

Companies are usually financed through a combination of debt and capital. The debts of oil companies are ultimately secured by reserves in the bowels of the earth. When the value of these reserves falls along with the price of oil, banks and other lenders begin to worry that their collateral will not be enough to cover the debt.

These circumstances can lead to default on a significant part of loans, and then lenders will take the measures prescribed by law to protect risks.

The collapse of oil prices in 2014 led to the insolvency of a number of companies, forcing them to restructure their debt. The same thing could happen again – due to a fall last week.

However, the catch is that since 2014, many companies have already introduced measures to reduce costs and improve work efficiency. They have no previous opportunities to repeat such decisive steps.

Under pressure from lenders and amid the need for restructuring, companies will have to sell off assets in order to balance, consolidate or consolidate.

And this will affect not only manufacturers. Similar risks threaten hundreds of enterprises throughout the supply chain – drilling companies, suppliers and contractors. The terms of the contracts will be carefully studied.

Companies will argue about changing conditions, delaying payments and breaking contracts, litigation and arbitration awaits. The entire matrix of contracts on which the industry is built will be under attack, and a serious chain reaction will follow.

Companies that prefer cash, were cautious about the accumulation of debts and prudently insured against falling oil prices – it would be easier for them to dispel the fears of creditors.

These companies will have the opportunity to purchase assets with a lower appraised value at bargain prices, while some sellers will even have to sell off part of their assets in order to pay off debts or find funds to finance operations.

However, amid great uncertainty regarding oil prices in the coming months, companies will become more cautious in making deals.

The long-term consequences will be profound. If upstream companies reduce their capital expenditures and investments, the result will be a huge hole in future reserves.

Ultimately, this will limit the supply – the exact opposite of the current situation will arise. When demand recovers and even grows, there will be a shortage of crude oil, and prices will skyrocket.

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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.

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