It’s not hard to miss the signs:
* The onshore Lower 48 U.S. states working-rig count has dropped more than 26% since the first week of 2019. While not the finger on the industry’s pulse it used to be, a drop of 271 rigs opens eyes
* Halliburton announced last week it’s laying off 800 personnel at one Oklahoma site, then days later said it was letting go of an undisclosed number of workers at another Oklahoma operation. The oilfield services giant also said it’s letting go of an undisclosed number of personnel and ending its well-cementing operations in Alberta Canada after more than 90 years
* Chesapeake Energy, just five years ago the U.S.’s second-largest natural gas producer, admitted in a recent Securities and Exchange Commission filing, it may not be able to continue as a “going concern”
* Independent producer Gulfport Energy in November stated it would work to improve its cash flow when it announced it had completed cutting 13% of its employees and boost early retirement of debt.
* The U.S. saw a sharp decline in support activities for mining in November, according to data from the U.S. Bureau of Labor Statistics (BLS). The BLS categorizes oilfield services under “support activities for mining.” It reported a loss of 5,700 jobs last month. The U.S. added just 100 jobs in mining support in October, but has lost jobs every other month in 2019.
* Jobs in oil and gas extraction declined by 800 in November, after adding 300 in October.
Many oil and gas industry watchers call it a slowdown, but if you friend is one of the thousands already laid off, or soon to receive the dreaded pink slip, it’s a recession – and if you are signing-up for unemployment or soon to do so, then it’s a depression.
Whoa
Cellar-dwelling natural gas prices and relatively low crude oil prices, due to a worldwide economic slowdown and primarily the bull-charging production by U.S. producers – despite Opec+’s efforts to stop the price slide – have finally convinced many investors, be they banks, other lending institutions, private equity firms, etc. to collectively tell O&G “whoa.”
Sources of funds no longer are interested in your grandiose projections for growth, for adding to assets, to pumping your company out of the doldrums, and aremuch more concerned with how closely their customers can match cash flow with projected expenses and operational needs.
Not that many years ago, many E&Ps and oilfield services firms talked extensively about living within cash flow, but few firms actually carried through with the rhetoric, Kallanish Energy reports. The availability of funding remained high, even if funds carried higher rates, move covenants, etc.
Laying down the law
Today, funding sources really are laying down the law, although tightening the proverbial screws, at least with smaller, more financially strapped entities carries the possibility of being handed the keys to the front door.
Long-time industry sages, men like Continental Resources Harold Hamm, have preached for years the industry better get its collective head out of the clouds and concentrate on making cash flow the primary funding source work.
Law firm Haynes and Boone tracks industry bankruptcies, but also keeps track of borrow-base redeterminations, having conducted 10 such surveys since April 2015.
Borrowing bases expected to drop
For the first time since 2016, the September 2019, survey revealed the majority of 221 oil and gas lenders, producers, professional services providers, oilfield services firms and “other” companies, expect borrowing bases to decrease in the then upcoming redetermination season.
Roughly 85 of question respondents see borrowing bases dropping by 10%, with another 47 forecasting no change.
Since 2015, Haynes and Boone has tracked North American oil and gas producer bankruptcies. After the initial wave in the first two years of more than 100 bankruptcy filings (2015-2016), the number of filings decreased substantially in 2017 and 2018 (24 bankruptcy filings in 2017 and 28 in 2018).
Uptick in filings
Through Sept. 30 of this year, there has been an uptick in the number of filings(33, with 27 filings since May 1).
Over the entire 57-month period, 199 producers have filed for bankruptcy since Haynes and Boone’s OilPatch Bankruptcy Monitor began tabulating E&P filings, involving roughly $108.9 billion in aggregate debt.
On the oilfield services firm ledger, through the first nine months of 2019, 15 North American companies have filed for protection from creditors, compared to a dozen for all of 2018.
Since the beginning of 2015 through September 30, 2019, Haynes and Boone has tracked the filing of 190 oilfield services bankruptcies detailing the secured and unsecured debt for each case.
The total amount of aggregate debt administered in oilfield services bankruptcies during this period is roughly $65.2 billion.
Key takeaways
In the borrowing base redeterminations survey, Haynes and Boone’s key takeaways included:
* Utilization of debt and equity capital markets as a source of capital for producers has gone from small in the spring 2019 survey, to miniscule in the fall 2019 survey
* Alternative capital providers are filling the void with debt financing – the percentage of respondents seeing debt from alternative capital providers as a primary source of capital has doubled since spring 2019.
* E&P companies will remain boxed in on capital sources for a while. Public equity markets – a primary source of capital for upstream oil and gas companies before 2018 – will not reopen until 2021 or later.
Ryan Savage, vice president and general manager for midstream giant Williams’ Pennsylvania & New York region, told attendees at Hart Energy’s 10th annual Marcellus-Utica Midstream Conference & Exhibition last week in Pittsburgh, there is no question that natural gas pricing is “very bad.”
Been here before
However – and this certainly is key – Savage, and many other presenters at last week’s “MUM,” echoed the same overall message:
“Pricing is very bad, but we’ve been here before,” Savage said. “And cheap BTUs solve the problem of cheap BTUs.”
There is little doubt the number of E&P and certainly oilfield services firms’ bankruptcies will increase heading into 2020. There will be a continued push by most companies to tread water until prices do rise.
Living within cash flow will take on added meaning to every company that survives the latest downturn.
Bankruptcies will increase
Chapter 11 bankruptcy filings will increase and companies with deeper pockets most certainly will pick the dying carcasses of highly leveraged players.
But Charles Darwin’s famous “survival of the fittest” phrase is put into practice constantly in the O&G industry, when prices bottom.
But, as Williams’ Savage said: “We’ve been here before.”
This post appeared first on Kallanish Energy News.
