NoTeaPartyPleez
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Get ready for Perry's highly touted Texas economy to tank. No pun intended.
Deep Debt Keeps Oil Firms Pumping
Producers Have Increased Their Borrowings by 55% Since 2010
ByERIN AILWORTH,RUSSELL GOLD andTIMOTHY PUKO
Jan. 6, 2015 8:33 p.m. ET - Wall Street Journal
American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion.
Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June.
But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment.
Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” said Daniel Katzenberg, an analyst at Robert W. Baird & Co. “There are too many ugly balance sheets.”
And mergers aren’t a panacea.
“To be a consolidator of a company that has a large cash-flow hole, you have to have the ability to fulfill that cash-flow need,” said Dennis Cornell, managing director and head of energy investment banking for the Americas at Morgan Stanley. “You can’t expect two companies with big problems with their cash flows to come together and mitigate that problem.”
Instead, the investment bank is “thinking of more creative ways of getting capital to clients,” he said, for example through private injections of capital.
Before crude prices began falling, U.S. oil and gas producers were able to acquire leases and drill wells even if that meant outspending their incomes. Debt was used to bridge the cash shortfall so that companies could develop oil fields in Texas, North Dakota and newer locations including Colorado.
The industry is also expecting a wave of asset sales and consolidations, though it may not gain momentum until the price of oil stabilizes and values become clearer. Bankers say companies are reluctant to get acquired with their stock prices under pressure, as they fear they could be selling low, and buyers don’t want to overpay if prices fall further.
In 2010, U.S. companies focused on producing oil and gas had $128 billion in combined total debt, according to financial data collected by S&P Capital IQ.
As of their latest quarter, such companies had $199 billion of combined total debt. The group doesn’t include Exxon Mobil Corp. andChevron Corp. , which also make money from refining, chemicals and pipelines.
Oil and gas producers’ revenues grew more slowly—rising 36% to $239.4 billion in the 12 months ended September 2014 versus $175.8 billion in 2010.
But oil is languishing at five-year lows—the U.S. benchmark fell to $47.93 on Tuesday—and natural-gas prices have fallen by 40% since June from about $4.70 per million British thermal units to less than $3.
Despite the cold winter, companies in the U.S. have been pumping enough gas to fill up storage around the country to high levels not seen in nearly five years.
Deep Debt Keeps Oil Firms Pumping
Producers Have Increased Their Borrowings by 55% Since 2010
ByERIN AILWORTH,RUSSELL GOLD andTIMOTHY PUKO
Jan. 6, 2015 8:33 p.m. ET - Wall Street Journal
American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion.
Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June.
But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment.
Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” said Daniel Katzenberg, an analyst at Robert W. Baird & Co. “There are too many ugly balance sheets.”
And mergers aren’t a panacea.
“To be a consolidator of a company that has a large cash-flow hole, you have to have the ability to fulfill that cash-flow need,” said Dennis Cornell, managing director and head of energy investment banking for the Americas at Morgan Stanley. “You can’t expect two companies with big problems with their cash flows to come together and mitigate that problem.”
Instead, the investment bank is “thinking of more creative ways of getting capital to clients,” he said, for example through private injections of capital.
Before crude prices began falling, U.S. oil and gas producers were able to acquire leases and drill wells even if that meant outspending their incomes. Debt was used to bridge the cash shortfall so that companies could develop oil fields in Texas, North Dakota and newer locations including Colorado.
The industry is also expecting a wave of asset sales and consolidations, though it may not gain momentum until the price of oil stabilizes and values become clearer. Bankers say companies are reluctant to get acquired with their stock prices under pressure, as they fear they could be selling low, and buyers don’t want to overpay if prices fall further.
In 2010, U.S. companies focused on producing oil and gas had $128 billion in combined total debt, according to financial data collected by S&P Capital IQ.
As of their latest quarter, such companies had $199 billion of combined total debt. The group doesn’t include Exxon Mobil Corp. andChevron Corp. , which also make money from refining, chemicals and pipelines.
Oil and gas producers’ revenues grew more slowly—rising 36% to $239.4 billion in the 12 months ended September 2014 versus $175.8 billion in 2010.
But oil is languishing at five-year lows—the U.S. benchmark fell to $47.93 on Tuesday—and natural-gas prices have fallen by 40% since June from about $4.70 per million British thermal units to less than $3.
Despite the cold winter, companies in the U.S. have been pumping enough gas to fill up storage around the country to high levels not seen in nearly five years.
