CHICAGO--(BUSINESS WIRE)--Pressure from activist shareholders to capitalize on the shale revolution and shed international assets over the last few years has left North American upstream companies with less downside protection in a sustained low oil price environment as they reduce exposure to production sharing contracts (PSCs), according to Fitch Ratings.
PSCs help stabilize free cash flow in a low oil price environment as operating expenses and capex are quickly recovered from a pool of cost oil before profits are paid to the state. As oil prices decline, private partners are entitled to increased production and reserves to cover costs.
'PSCs have been viewed as less exciting than shale over the last several years,' said Mark Sadeghian, Senior Director. 'However, they are a safe harbor for upstream companies as they weather the current low oil price storm.'
Activist shareholders have played a large role in many recent upstream restructurings including Jana Partners and Apache, Elliot Management Corporation and Hess, and Third Point and Murphy Oil. E&Ps with exposure to PSCs are likely to benefit from the operational hedge they provide if oil prices remain low. They're also more likely to provide a boost to credit metrics like debt per barrels of oil equivalent reserves and debt per flowing barrel in a low oil priced environment.
The full report, 'Production Sharing Contracts: Countercyclicality Supports Debt in a Low Oil Price Environment,' is available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Production Sharing Contracts (Countercylicality Shines in a Low Oil Price Environment)