Oil Declines and Companies Borrow

Crude oil dropped below US$30 a barrel last night. The selloff occurred when Iran announced a ramp up of their oil exports. The oversupply has done noticeable damage to the market so far. Some are betting on oil to plunge even further to US$20. But in the meantime oil companies are hoping that the cold war between Iran and Saudi Arabia heats up. If so, then it could send oil prices in an opposite direction from their current trend.

Crude Oil Price

Source: Investing.com

Keeping shareholders happy

Car owners are happy. You know why? Because petrol is still amazingly cheap. Petrol prices are still below the dollar market in Melbourne. I can only image that drivers Victoria wide are finally looking forward to their Sunday drives.

Oil companies do not share the same positivity. The drop in oil has made a stressed industry even worse. Current oil prices have forced drastic cost cutting measures. And for some, this is no longer a possibility.

The world’s largest oil companies are planning to keep shareholders happy by borrowing more money. Costs have already been cut. The only place to turn to now is the banks. This isn’t happening to US oil companies only. It’s happening here too, to Australian oil producers.

Woodside Petroleum [ASX:WPL] is just one of Australia’s oil and gas producers. WPL’s net debt rose by almost $3.2 billion in 2015.  And one of the world’s largest oil company, BP Plc, is in the same boat. BP borrowed almost $5 billion last year. And just like WPL’s it was all to make shareholders happy.

BP CEO, Bob Dudley said he would borrow billions more if it was to sustain investor dividends. ‘We know how important the dividend is to our shareholders…We are not going to drop the company off a cliff. But I think the balance sheet is strong right now.

The graph below shows the net debt in four major oil companies.

Net Debt of oil majors rising

Source: Bloomberg

Not surprisingly most oil companies are plunging themselves further into debt. All to make shareholders happy. But is it working?

BP stated that their balance sheet was looking strong. Yet WPL’s balance sheet is not particularly healthy. Productions, operating revenue and dividends have all decrease in 2015 for WPL. Oil accounts for 14% of Woodside’s production and they are still feeling shocks throughout their entire balance sheet.

But even though drivers are happier for the change the word recession is resurfacing. IG’s chief market strategist, Chris Weston said:

When you see BP coming out with disastrous results and when you see Exxon cutting back on expenditures again, you realise the implication week oil has on the economy. How much more can central banks do from here?

So if you think the mining industry is bad, just be thankful you’re not in oil. Things are getting worse before they get better.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Oil is projected to only go lower. But that doesn’t mean you should right off all commodity industries. Bear markets are Warren Buffett’s favourite to invest in. And the mining industry is looking like a bear market for 2016.

According to Resources Analyst Jason Stevenson, now is the time to snap up some incredible bargains in Australia’s most unloved market sector.

There are plenty of cheap mining stocks out there and Jason will tell you the 10 best for 2016. To get your free report today, click here.

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