Europe Weakest Oil Firms Reel Amid Fear of Financial Stress

(Bloomberg) --

Fears that collapsing energy prices will push Europe’s most indebted oil firms to the brink triggered a massive sell off in their bonds and shares on Monday, adding to broader stress from the coronavirus.

The selloff comes after the International Energy Agency warned global oil demand will fall this year for the first time since the financial crisis. Oil prices crashed more than 30% on Monday as a price war loomed between energy-exporting nations.

With the outlook darkening for the sector, oil and gas companies are likely to have a tougher time persuading bankers to keep extending credit. Lenders evaluate the value of oil reserves used as collateral for loans twice a year and many companies are still weakened from the last oil-price rout in 2014.

What Bloomberg’s Analysts Say

With high oil weightings in production mixes, relatively levered balance sheets still recovering from the 2014 downturn, higher operating costs, and some with unhedged exposure, Europe’s independent explorers and producers hold elevated exposure to downside oil price risk.

-- Will Hares, Bloomberg Intelligence

Oil firms are also unable to turn to the bond market for new capital since primary issuance has been at a standstill over the coronavirus since last week. With few options for raising much-needed cash to service debt and cover day-to-day running, the sector faces a potential spike in corporate defaults, starting with the weakest, most levered names.

Shares in Norwegian offshore driller Seadrill Ltd. fell as much as 44% on Monday. The company is already in talks with its banks over reviewing its $6 billion bank debt which was left over after a 2018 restructuring.

Shares and bonds issued by U.K. oil producers Tullow Oil Plc, Premier Oil Plc and Enquest Plc dropped to multi-year lows while French oil-pipe maker Vallourec SA emerged as the worst performing company on the Bloomberg Barclays High Yield Index.

Multi-Year Lows

Tullow Oil’s bonds due 2025 fell 9 cents on the dollar and its shares are at a quarter-century low. Premier Oil, one of the sector’s most indebted European companies that’s seeking court approval to extend maturities on its $2 billion debt, suffered an 84% share-price rout.

Read More: Oil Demand to Drop This Year for First Time Since 2009, IEA Says

Vallourec’s 2023 notes are quoted at 76 cents on the euro, down 15 cents since Friday, according to data compiled by Bloomberg while its stock fell as much as a third to the lowest on record. The company had been enjoying a bond-price rally after announcing plans to bolster its balance sheet with a capital hike.

“The current market conditions will make it difficult for Vallourec to carry out the planned 800 million-euro capital increase,” according to Jan Patteyn, a credit analyst at Octo Finances in Paris.

--With assistance from Antonio Vanuzzo, Mikael Holter and Irene García Pérez.

To contact the reporter on this story: Luca Casiraghi in London at lcasiraghi@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott

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