Creditworthiness of North American Oil Companies and Minsky Financing Categories: Assessment of Shifts Due to the 2014-2016 Oil Price Shock
Journal of Finance and Accounting
Volume 6, Issue 6, November 2018, Pages: 162-180
Received: Nov. 2, 2018;
Accepted: Dec. 5, 2018;
Published: Jan. 16, 2019
Views 364 Downloads 86
Ruud Weijermars, Harold Vance Department of Petroleum Engineering, Texas A&M University, College Station, USA
Alison Johnson, Transocean Offshore, Houston, USA
John Denman, White Rock Oil & Gas, Plano, USA
Kim Salinas, ING, Natural Resources, Houston, USA
Gregg Williams, Trident Pacific Holdings, Newport Beach, USA
Our study provides a unique and comprehensive analysis of oil and gas companies' performance over the latest oil price crisis of 2014-2016. The oil price declined under the pressure of global oil oversupply instigated by OPEC under the strategic leadership of Saudi Arabia, in an effort to retain market share by diminishing the production growth of shale oil and oil from oil sands in North America. The financial performance of 45 North American oil companies was assessed over the 2014-2016 period of decreased oil prices, distinguishing six peer groups based on market capitalization, of which 11 representative companies were selected for further in-depth analysis. For each selected company, a forensic financial analysis was performed on the three principal accounts of corporate financial performance: profit-loss account, cash flow account and balance sheet. Financial accounts were consolidated in annualized graphs for 2010-2015. Next, the historic production output and operational income from the existing assets (2010-2015) were projected forward to stress test future liquidity positions (2016-2020). These projections incorporated known maturation dates of corporate debt and any announced divestments and/or acquisitions. The majority of the companies are classified in Minsky's speculative financing category, which is riskier than hedge financing and less risky than Ponzi financing. The oil price collapse pushed numerous companies into Ponzi financing and led to a record number of bankruptcies. Lessons learned and recommendations are formulated for company management, shareholders and lenders, based on the corporate financial performance of the analyzed companies during the decade (2010-20120) spanning the 2014-2016 oil price shock.
Creditworthiness of North American Oil Companies and Minsky Financing Categories: Assessment of Shifts Due to the 2014-2016 Oil Price Shock, Journal of Finance and Accounting.
Vol. 6, No. 6,
2018, pp. 162-180.
Sun, Z. and Weijermars, R., 2018. Regression Analysis of Historic Oil Prices: A Basis for Future Mean Reversion Price Scenarios. Global Finance Journal, v. 35, p. 177-201.
Weijermars, R., 2010. Tracking the impact of recession on oil industry supermajors and timing of sustained recovery. First Break, Vol. 28, no. 1 (January issue), p. 33-39.
Weijermars, R. 2011. Credit ratings and cash-flow analysis of oil and gas companies: competitive disadvantage in financing costs for smaller companies in tight capital markets. SPE Economics & Management, 3, (2011), 54-67. SPE-144489. doi :10.2118/144489-PA.
Myers, St. 2003. Chapter 4 – Financing of Corporations. Volume 1, Part A, 2003, Pages 215–253. Handbook of the Economics of Finance.
Cirilo Agostinho, M. S. and Weijermars, R., 2017. Petroleum Business Strategies for Maintaining Positive Cash Flow and Corporate Liquidity under Volatile Oil and Gas Prices as the Sustainable Energy Transition Unfolds. Journal of Finance and Accounting, Vol. 5(1), p. 34-55.
Bocardo, A. B., and Weijermars, R., 2016. Total Shareholder Returns from Petroleum Companies and Oilfield Services (2004-2014): Capital Gains and Speculation Dissected to Aid Corporate Strategy and Investor Decisions. Journal of Finance and Accounting, Vol. 4(6), p. 351-366. doi: 10.11648/j.jfa.20160406.16.
Weijermars, R., and Bocardo, A. B., 2016. Shareholder Valuations of Petroleum Companies and Oilfield Services During the 2008 and 2014 Oil Price Shocks. Journal of Finance and Accounting, vol 4(6), p. 367-377. doi: 10.11648/j.jfa.20160406.17.
Minsky, Hyman P. Ph. D., 1977. A Theory of Systemic Fragility. Minsky Archive. Paper 231. http://digitalcommons.bard.edu/hm_archive/231.
Minsky, Hymann, 1992. The Financial Instability Hypothesis. Levy Economics Institute Working Paper No. 74: 1-8.
Donaldson, G. 1961. Corporate Debt Capacity: A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity. Boston, M. A.: Division of Research, Harvard School of Business Administration.
Myers, S. and Majluf, N., 1984. Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have. Journal of Financial Economics 13, 187 – 221.
Weijermars, R., 2012. Jumps in proved unconventional gas reserves present challenges to reserves auditing. SPE Economics & Management, Vol. 4, No. 3 (July), p. 131-146 (SPE 160927-PA) & Online First 10 May 2012.
Haynes and Boone, 2017. Oil patch bankruptcy monitor, 31 October 2017, http://www.haynesboone.com/~/media/files/energy_bankruptcy_reports/2017/2017_oil_patch_monitor_20171031.ashx.
Weijermars, R., 2010. Bigger is better when it comes to Capital Markets and Oil Liquidity. First Break, Vol. 28, No. 6 (June issue), p. 37-41.
Rodriques, W. and Weijermars, R., 2016. Assessing the impact of two recessions on the oil and gas industry: severity of declines and future outlook. First Break, vol. 34, January Issue, p. 79-85.
Watson, S. and Weijermars, R. 2011. Unconventional Natural Gas Business: TSR Benchmark and Recommendations for Prudent Management of Shareholder Value. SPE Economics & Management, vol. 3, no. 4, p. 247-261, SPE-154056.
Weijermars, R. 2011. Moving the Energy Business from Smart to Genius by Building Corporate IQ. SPE Economics & Management, Vol. 3. Issue 3 (July), p.186-194 (SPE paper 144490-PA).
Weijermars, R. 2012. Corporate IQ Optimization as a Mitigation Strategy against Enterprise Disconnect. International Journal of Energy Engineering, vol. 2, issue 4, p. 102-108.
Weijermars, R. 2011. Building Corporate IQ: Moving the Energy Business from Smart to Genius: Executive Guide to preventing Costly Crises. Springer, London, 2011.