North African oil and gas producer Circle Oil (COP:AIM) falls 21.7% to 2.94p as it warns it may have to restructure its debt following the collapse in oil prices.
Investors can expect an increasing number of these type of announcements from companies with lending facilities linked to the estimated value of their reserves. So-called reserve-based lending (RBL) was a common form of financing in the E&P industry and banks are in the process of scaling back funding based on more conservative commodity price assumptions.
In Circle’s case the company – which has assets in Morocco, Egypt and Tunisia - says it is struggling to come to an agreement with the World Bank’s International Finance Corporation (IFC) over RBL lending.
It has drawn $57.5 million from the IFC facility but once the borrowing base is reduced to reflect ‘further weakening of global oil prices, varying production levels in NW Gemsa and the impact of macro events on payments from EGPC (Egypt’s state oil company)’ there is expected to a be a moderate shortfall and a debt restructuring or equity raise may be required to plug the gap.