Some of the biggest energy groups of the world, including Exxon Mobil Corporation (NYSE:XOM), have so far this year given debts, which amount to the record high. The collective sales of debt by BP plc (ADR) (NYSE:BP), Total SA (ADR) (NYSE:TOT), Chevron Corporation (NYSE:CVX) and Exxon amounted to $31billion in January and February 2015. Interestingly, this is almost half of the debt ($63 billion to be precise) sold by the oil and gas companies in the entire world.
Plugging cash shortfalls with debt
This is reflecting a trend of manipulation of the historically lowest rates of interest, in order to cork the cash shortfalls against debt, after the oil prices plunged 50%.
According to a research conducted by Morgan Stanley (NYSE:MS), the overall debt raised by these giant European and U.S. oil and gas companies in just initial two months of this year, has soared by over 60% from the combined last three months of 2014. This has clearly outshined the previous record of quarter that was created six years in the past.
Major borrowings: A Foundation for Acquisition?
While talking to the Financial Times, a U.S. bank analyst, Martijn Rats opined that the rate and amount of borrowings by some of the major oil and gas companies indicate that a foundation for business expansion through acquisition might be in the play. The huge amount of borrowings at this time will enable these oil majors to acquire or merge instantly with the groups that would become vulnerable or weakened.
Martijn Rats hinted a faster pace of M & A activities post second half of 2015. Due to this, he explains, it would become realistic for combined oil companies to contain highly aggressive financing rates.
Affect on small oil explorers
This in turn is likely to affect the small-scale oil explorers, who might witness an increase in the borrowing costs. GULF KEYSTONE PETRO (OTCMKTS:GUKYF) recently showed interests of being sold. Meanwhile, Enquest PLC (OTCMKTS:ENQUF) had to sit on the table with its banking agreement for renegotiation.
These major oil companies have created a way to have a huge share of total debt issuance in this industry. In 2015, this has amounted to 48%, an increase from 30% of 2014’s period of October-December.