Aramco Leads Surge in Gulf Energy Loans After Oil’s Plunge

  • Middle East oil borrowings at $12.9 billion in second quarter
  • Lower crude prices spurred companies to tap credit markets

Saudi Arabian Oil Co. is leading a surge in borrowing by energy companies in the Middle East as they turn to banks and investors for cash after a drop in oil prices eroded their ability to pay for exploration and production.

Energy producers in the six-nation Gulf Cooperation Council tripled their borrowings in the second quarter from a year earlier to $12.9 billion, the most in 15 months, data compiled by Bloomberg show. Yanbu Aramco Sinopec Refining, a joint venture between Saudi Arabian Oil, known as Aramco, and China Petroleum & Chemical Corp. was the top borrower at $4.7 billion.

Lending rose as state-run companies including Kuwait National Petroleum Co. took advantage of falling borrowing costs. The J.P. Morgan Middle East Composite Index of the region’s debt yield, an indication of borrowing rates, is at the lowest since October 2015. 

Cheaper crude squeezed revenue at oil companies, with the benchmark Brent contract dropping to a 12-year low of $27.10 a barrel in January from more than $100 a barrel two years ago. Saudi energy companies have borrowed $23.1 billion in the last 18 months, almost as much as the $23.4 billion they took in all of the previous eight years.

"It’s the economics that’s driving these companies to borrow, mainly because of the low oil revenue and the higher need to pass on more revenue to the treasuries of each country,” John Sfakianakis, director of economics research at the Gulf Research Center, said in a phone interview from Riyadh. “In the old days, national oil companies had enough revenue to finance investments to maintain their existing capacity, as well as pass on a substantial amount of money to the treasury."

Kuwait National Petroleum took out $4 billion in loans in the second quarter to finance clean-fuel projects and for general corporate purposes, and Petroleum Development Oman LLC obtained the same amount for project financing.

The $12.9 billion in Middle Eastern credit from April to June was the second-highest for any quarter in data compiled by Bloomberg since 1996, after a record $18.4 billion in the first quarter of 2015 when Aramco took $10 billion for refinancing and general corporate purposes.

Borrowing costs for companies in the Middle East have eased this year as crude prices rallied by about 30 percent. Total bonds and loans issued by oil companies in the GCC are $17.2 billion so far for 2016 compared with a record $23.7 billion in 2015.

It’s a different story for the U.S. energy industry, which struggled with diminishing output of shale oil after the crude-price slump. Since the start of 2015, 142 oilfield service companies and oil and gas producers have gone bankrupt, owing almost $62 billion, according to law firm Haynes & Boone. Energy companies in the U.S. have been virtually shut out of the high-yield bond markets, while banks are cutting credit lines and asset sales have slowed.

Debt will remain available to low-cost Gulf oil producers, albeit at higher rates as emerging-market credit is re-priced after the U.K. voted last week to leave the European Union, Sfakianakis said. "It’s nearly impossible for a national oil company to go bankrupt unless oil prices tank below $10, and I don’t see it going anywhere close to that."

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