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How will a U.S. government shutdown impact energy commodity markets and energy company valuations? Risk factors having the biggest impact include (i) which agencies will experience significant furloughs and which will be deemed essential, (ii) how the shutdown materially impacts consumer confidence and (iii) separate administrative actions impacting renewables which can amplify the impact of the shutdown. Notwithstanding the foregoing, the most impactful risk factor is over what period the shutdown will take place.
Short-Term Shutdown
A 30-day (short-term) shutdown will likely have a minimal impact on commodity prices with most of the impact attributable to a lack of reliable governmental data as weekly federal energy and economic data will be delayed or less reliable due, at least in part, to some non-essential federal agency employees being furloughed. The lack of reliable data could, however, lead to more price volatility. Significant downward pressure on the prices of oil and gas should be minimal as existing drilling, production and exports should largely continue because companies operate under existing leases and permits, and essential regulatory oversight is expected to continue. With respect to valuations, the impact from a short-term shutdown is seen as being relatively modest for most, with renewable developers and project-financing sensitive businesses being the most exposed.
Long-Term Shutdown
A 90-day (prolonged) shutdown will have a more significant impact on commodity prices. With respect to the price of oil there are two offsetting factors: (i) there will be supply-side restraint and upward pressure on pricing if federal permitting or offshore leasing is delayed; and (ii) there will be is downward price pressure if there is a macro decrease in demand due to lower GDP. Furthermore, delayed LNG approval and FERC processing can slow export growth creating upward price pressure on gas. Additionally, longer permitting times and tax credit uncertainty can push higher short-term financing costs in the renewable subsector. With respect to valuations, like with a short-term shutdown, the subsector with the most exposure to loss in valuation are renewables developers and tax-credit dependent projects.
What should businesses do at this stage? We'd recommend: (i) reviewing covenant and liquidity stress tests assuming 30- and 90-day delays for project cash flows; (ii) avoid over-leveraging future exposure dependent upon the timing of federal approvals; and (iii) prioritize contracts that lock in buyer/seller obligations regardless of permitting timing (e.g., force majeure clauses, termination rights, rights to extend).
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