Picking the bones

When the price of an asset drops by 50pc in six months there are likely to be casualties. Where there are casualties, scavengers soon follow. The oil industry’s experience is proving no exception — the vultures are circling.

Listing today on London’s Alternative Investment Market, Highland Natural Resources (HNR) sounds like a purveyor of bottled water. But it makes no bones about its real purpose. Established “to take advantage of volatile conditions” in the oil and gas market, its primary strategy is to acquire quality assets with stable income, at current oil prices, from distressed companies. Chief executive Robert Price said HNR will capitalise on the “increasingly desperate” number of debt-ridden companies.

Price and his colleagues at HNR are by no means the only people to spot the upcoming possibilities. US independent Linn Energy this week signed a $1bn equity deal with private equity investor Quantum Energy to “capture acquisition opportunities during distressed market conditions”.

But these vultures are a welcome sight in a market being squeezed of liquidity. There is no joy to be had in a buyers’ market if there are no buyers, after all.

Look anywhere and you’ll find oil and gas companies cutting their cloth. From Canada to Russia and all points in between, upstream capex is being cut. But HNR’s Price thinks this will not be enough to compensate for all the debt being held in the sector.

Although Barclays research concludes that a number of US exploration and production companies will find it difficult to keep operating at current oil price levels, most US high-yield debt maturities do not become “significant” until 2018-19. But the companies that will begin to feel the pinch won’t want to wait until the last minute to ease their burden. The recent experience of Swedish upstream independent PA Resources attests to the enormous distractions that come with such a situation.

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