11th March 2020
What are the legal issues caused by a crash in oil prices?
- Sudden drop in oil prices means loan covenants could be breached
Presents M&A opportunities for companies with spare cash
The price of crude crashed by more than 30% on March 9 following Saudi Arabia’s decision over the weekend to increase its production, which is the biggest fall in prices since the Gulf War in 1991, says Mayer Brown, the international law firm.
Mayer Brown says this crash could create significant legal issues for oil & gas companies, especially as share prices have already been under pressure for various reasons, including reduced demand caused by the coronavirus.
Impact on financing
Bob Palmer, partner at Mayer Brown comments: “A sudden drop in oil prices can bring with it some difficult legal issues for oil and gas producers.”
“Some oil and gas companies use their reserves as collateral to secure loans. A fall in prices means the value of this collateral drops, which can in turn trigger defaults in financing agreements”.
“For highly-leveraged companies, curing these defaults could prove challenging. The current price drop has echoes of the 2014 oil price crash, during which a number of companies had to be restructured, while others had to liquidate assets.”
Impact on M&A deals
Bob adds: “Companies are generally nervous about agreeing deals to buy or sell oil assets and shares when the oil price is volatile and confidence in pricing models is low. However, a large drop in the oil price is not necessarily bad news for everyone in the industry. It can result in companies with spare cash acquiring assets at attractive lower prices. Companies that are already undervalued could now become targets.”
“If the oil price stays low for long enough, there is likely to be some stagnation in drilling and development activity. Investing in upstream operations requires a degree of certainty over where prices will be in the future.”