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COVID-19: alternative capital sources may lead to expensive costs

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As energy companies near bankruptcy due to Covid-19 look for alternative capital sources, they may be acquiring expensive long-term costs. Legal and capital-research firms recommend to prioritize loan payment and to look after reliable energy lenders.

At the U.S. Tight Oil and Gas Outlook event, sponsored by Haynes and Boone, LLP and Rystad Energy, experts discussed the pandemic’s capital effects in different energy subsectors; the concerns of producers and bankers; and about credit options for companies to consider.

Where to rely on?

Participants agreed that alternative capital sources outside the energy sector might turn into a problem in the future.

All the companies in the industry have lenders and operators who they rely on. However, experts consider that to ask borrowed from diverse, and outsider capital sources must be a last resource for them, given the pandemic’s context.

Also, panelists observed that there will always be a supply for credits if there is a demand. In that regard, participants recommended prioritizing the energy sector’s lenders and credit options versus non-reliable or untrustful sources.

COVID-19 and latest trends in the sector

According to experts, upstream activities represent the most affected by the pandemic. In particular, drilling and fracking faced an unprecedented collapse in capital activity, investment, and operations expansion.

75% of drilling activities in the U.S. collapsed since the COVID-19 pandemic started. It wasn’t until July that they recovered modestly.

Regarding fracking activities, a similar story goes on. Not many of them were completed, collapsing even faster than drilling in the second quarter of 2020. Recent investments in oil basins, such as the Permian Basin, were behind a slight fracking recovery in September.

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For tight oil, the growth pace declined this year. However, by now, most companies in the subsector have reactivated their activities. According to participants, deposits are currently much mature.

On the gas side, activities started declining in the second half of 2019. Covid consequences led the subsector to reach the bottom in July this year.  

Nonetheless, the gas economy is a unique case in the pandemic’s context since it improved substantially. For instance, gas prices are responding and adapting quickly.

Forecasts and projections in a post-COVID-19 scenario

Experts observed the standard business model is rapidly changing. What Covid-19 left to the industry are more disciplined behaviors, more low-cash generation, and lower reinvestment activities.

According to participants, most of the growth in the energy sector across the U.S. will come from investments in the Permian Basin since very well-established companies are joining efforts in the region.

Additionally, panelists stated in the long-term, they foresee a decrease in capital spending. They finally added that it would be challenging to achieve pre-Covid production, capital, and investment numbers.  

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