European oilfield services firms face a surge in debt when new accounting rules come into force in the new year, according to a leading credit rating agency.
From January 1st a new accounting standard will come into effect, known as IFRS 16, changing the rules around lease payments.
Scope Ratings said this will have a “potentially dramatic impact” for oil services firms and exploration and production companies who use operating leases for assets like land, drilling rigs, vessels and other machinery.
Under present rules, lease payments are recognised as operating costs and are not part of a company’s EBITDA – earnings before interest, tax, depreciation and amortisation.
However, the new rule closes a loophole which will mean all lease payments need to be recognised as depreciation and interest components.
As a result of this, firms will appear more asset-rich but also more indebted.
Scope carried out an impact study estimating European oilfield services firms will see debt surge on average by 40%, based on 2017 figures.
The firm said the way the sector reacts will be a “test case” for the new rules, being put in place by the International Accounting Standards Board.
Analyst at Scope, Thomas Faeh, said: “On the balance sheet, reclassing operating leases as financial leases will increase company’s assets but also their debts.
“The new standard seeks, among other things, to close a loophole allowing companies to distinguish between financial leases, booked as liabilities, and operating leases, bookable as expenses under the previous IAS 17 standard.
“By changing important income statement, cash flow, and balance sheet metrics, lessor agreements and banking covenants may have to be reassessed as well as the financial risk profile of the companies for those analysts and investors who haven’t yet taken the heavy use of operating leases into account.”
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