North Sea Firms Are ‘Sleepwalking into Disaster’ as Insolvencies Loom
The North Sea industry is sleepwalking into a wave of insolvencies in the coming months as the full brunt of the collapse in the price of crude causes the finances of many companies to buckle.
The majority of North Sea firms have so far endured a punishing 70% oil price decline since 2014 by relying on loans that were approved based on market hedges secured one to two years before the market crash.
But with hedge positions now unwinding, firms will be exposed to the full brunt of the oil collapse and the increasingly stressed loan facilities keeping them afloat will be stretched to breaking point.
Lenders may have offered firms a stay of execution last year in anticipation of a market recovery, but hopes for significantly higher crude prices are now dashed.
Within weeks, big North Sea lenders will begin a review of the loans that have propped up many explorers through the 18-month oil price rout, prompting a swath of insolvencies later this year.
North Sea bankruptcies have been rare, but the severity of the current downturn has already forced Iona Energy and First Oil Expro, two smaller oil companies, to call in administrators.
Now larger firms look to be at risk, which will also leave project partners and oilfield service firms vulnerable as the financial contagion spreads through the embattled sector.
Most oil companies have not been selling their oil at $30 a barrel, they’ve been selling it at prices like $75 a barrel, notwithstanding the spot price of oil, because they’ve had financial hedges in place. The impact of this collapse is going to be very bad. In oilfield services, the position is significantly worse. The question is: when will lenders pull the trigger?