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Oil Fire in the Credit Market

14.12.2015

The equity is in reality lost in almost all steel owning Norwegian offshore companies. The shares are traded as options, whereas the bonds have become the new shares.

This month OPEC held a meeting that ended in disarray. The cartel could not even agree on what the official quota should be going forward, and this sent the oil price into a downward spiral.

This fruitless meeting is bad news for the Norwegian oil industry, but the low oil price now poses a major threat to creditors, more so than equity owners. The reason is that equity value in steel owning offshore companies have practically been obliterated already.

A lot of doubtful debt

While the share prices on the Oslo Stock Exchange have already taken heavy losses, the same cannot be said about the credit market. Losses will topple over banks and bondholders in 2016. We have already received a taste of that in the form of the recent defaults of the seismic companies Polarcus and Dolphin.

The losses can quickly become uncomfortably large. One can mention that while the small supply shipping company DOF has a market capitalization of a mere NOK 560 million, the debt is at an unpleasant NOK 25 billion.

Furthermore, we must not forget that the world’s largest drilling company, Seadrill, has NOK 117 billion in debt. The interest rate that the company must pay to borrow money in the bond market has risen from 12 to 19 percent since the summer.

When capital-intensive businesses have to pay credit card interest rates to borrow money, it is usually just to close their ears and wait for the bang.

Three pitfalls

Normally, falling oil prices is good news for the world economy. However, this is no longer the case.

We are generally positive towards the equity markets in 2016, but we also see three main threats. The first one is that a price war and full oil storages will lead to a fall in the crude oil price towards "cash cost" for shale oil producers around $ 20 per barrel.

In such a scenario, loan losses in the oil sector could be so gigantic that it triggers a global mini financial crisis. Credit spreads have already widened sharply in the trendsetter US high yield bond market this autumn.

A lot of this is due to the raw materials sector, but not everything. US listed companies have also increased their leverage by issuing debts in order to buy back shares. This undermines the security of creditors.

Chinese devaluation

The second main risk is a sharp Chinese devaluation. That would trigger fears of deflation and would send stocks and commodity prices down.

The last main risk is geopolitical. Of all the things that can go wrong, we can mention massive terrorist attacks, upheaval in Saudi Arabia, a breakdown in EU cooperation and an election victory for populists like Donald Trump.

Dovre-portfolio:

  • Panoro Energy
  • Det norske oljeselskap
  • REC
  • Aker Solutions
  • PGS
  • Thin Film

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