The interaction of differences in US oil well productivity with heavily indebted companies is an impending danger

John Robertson

PortfolioDirect

The interaction of differences in US oil well productivity with heavily indebted companies is an impending danger. The March quarterly review from the Bank for International Settlements has estimated US oil company debt accounts for around 40% of globally syndicated loans and debt securities in the sector. The ratio of debt to assets which is largely unchanged for large US companies since 2006 has almost doubled for smaller companies. Meanwhile, as the chart shows, a continuing rise in crude oil production has come despite a 42% fall in the number of operating oil rigs in the USA. Diversity in well productivity rates has stalled the need to cut production with new rigs more than compensating for those taken out but currently high productivity new wells will also eventually face diminishing returns compromising the ability of owners to service debt. What has appeared in the best short term interests of the most vulnerable of these companies as a response to weakening oil prices stores up the pressures for a more dramatic adjustment at a later stage.


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John Robertson
John Robertson
PortfolioDirect

John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...

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