Market Insider

Oil collapse couldn't come at worse time for industry

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How low can oil go?

The U.S. energy industry was licking its wounds when oil recovered to the $60 level in April. Now, with the price of a barrel back in the $40s, the industry mood is dark, with an outlook for lower oil prices well into next year, meaning more shelved projects, deeper cost cuts and tighter-than-expected funding.

Funding is the life blood of U.S. energy supply, as it provides cash flow for an industry that needs to make capital expenditures in order to make money. A cutback in funding could mean less drilling, which is bullish for the price of oil, but negative for companies seeking to generate cash flow.

That makes the price of oil the wild card—and all the more important as fall approaches. October is when bank lenders perform a biannual review of the loans and revolving credit they make available to exploration and production companies, particularly those in the high-yield space. But because of the sharp drop in crude prices and weak outlook, banks are looking more broadly at their exposure across the industry. And for a small universe of the riskiest names, credit lines could be reduced or cutoff.