Assessment of an oil company probable default
The problem of default probability assessment of oil and gas companies became urgent because of sectoral sanctions introduced in the second quarter of 2014 and directed against Russian O&G companies and certain state-owned banks. The article presents some method to be applied for assessment of probability of an O&G company’s default in case of decrease of worldwide oil prices. The example of the method’s application to a mid-size oil company (with account of the Russian taxation system) is given. The article employs mathematical apparatus of stochastic processes theory. Numerical modeling is used to obtain probability distribution functions of cash-flows and to assess a company’s default probability in case of availability of some certain level of debt load. After making minor modifications the model can be applied to almost any producing company. It also can be used to solve a broad scope of problems such as stress-testing of a company’s credit standing, default probability assessment of a large borrower or a project, modeling of a mineral company value, etc.