US inroads into delivering shale oil and gas from vast reserves are driving down the cost of crude worldwide.
A massive drive to develop shale deposits to cut America’s shackles tying the country to reliance on imports is starting to hit the global market for oil.
Prices have fallen to less than $80 a barrel as demand from the US drops amid fears in oil-producing countries that shale production will soon outstrip demand and push prices even lower.
Industry experts are warning investors that they should consider moving their money away from oil companies to oil infrastructure, storage and transportation to protect their portfolios from the drop in prices.
Slowing growth in many leading economies is also reducing demand for oil and gas worldwide.
Too much debt
Kames Capital’s High Yield Global Bond fund managers Phil Milburn and Claire McGuckin believe some oil companies are insulated from declining prices, but many are at risk because they have borrowed too much to increase production.
McGuckin argues several companies are funding exploration and production from debt which will become difficult to service from cash flow as oil prices decline.
“US independent oil companies have noticeably increased their debt in recent months to try and pump up production to maintain profits as prices have fallen,” she said.
“We’re pulling out of these companies as we expect the yield does not reflect the underlying risks.”
Now, the fund is looking at oil companies with less exposure to debt to ride out the storm in the sector should prices fall even further.
Chesapeake Energy and Linn Energy are cited by the pair as two large cap stocks who have hedged against production for some years to come.
“This is a significant buffer and should give investors confidence if the price per barrel of oil continues to drop,” said McGuckin.
Even some of the world’s largest oil companies are feeling the pinch from the price slip.
BP reported a 19% fall in third-quarter profits due to the shift in the US market.
The company has also taken knocks from paying out $50 billion in compensation for the Gulf oil spill and a tie-up with Russian’s largest oil producer Rosnaft that has so far ridden out the effect of US and European Union sanctions over the annexation of The Crimea.
The Share Centre is recommending investors drip-feed into BP as dividends unexpectedly rose by 10 cents.