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Energy’s “day of reckoning” may come in 2016

Attorneys, accountants and investment bankers were told there is a growing consensus that lower commodity prices will be around for some time — possibly as long as another 18 months.
Attorneys, accountants and investment bankers were told there is a growing consensus that lower commodity prices will be around for some time — possibly as long as another 18 months. Midland Reporter-Telegram

While you may think things are tough financially in the oil patch now, many in the oil and gas industry think the worst is yet to come and the “day of reckoning” may actually be next year.

This less than cheery outlook hung like a dark cloud over those attending a seminar at the Fort Worth City Club Thursday called “Exploring Opportunities in the Distressed Oil Patch.” The event was sponsored by the Haynes and Boone law firm’s Fort Worth office.

Attorneys, accountants and investment bankers were told there is a growing consensus that lower commodity prices will be around for some time — 18 months or longer — dour news made worse by bank regulators stepping up the pressure on lenders about energy loans.

There will be more bloodletting.

Brian Barnard, administrative partner at Haynes and Boone

“The day of reckoning may be next spring,” said Brian Barnard, administrative partner for Haynes and Boone in Fort Worth. “There will be more bloodletting.”

Barnard partially based his assessment on a survey the firm did this fall of oil and gas lenders, producers and service providers. In that survey, 79 percent expected a decrease in their revolving lines of credit, with the average decline of 39 percent.

Through the end of October, energy companies have so far reported a net reduction of 4.2 percent, or about $1.23 billion in the aggregate, in their credit lines, Haynes and Boone reported.

“We have been told by energy lenders and others that there are several more re-determinations of borrowing bases ....that aren’t in as good a shape and they have been put at the back of the queue and we may not learn about these results until December,” he said.

On Friday, Baker Hughes reported that the number of rigs exploring for oil and natural gas dropped by four to 767. A year ago, with oil prices about double the price, 1,928 rigs were active.

The price of oil continued to slide Friday on reports that global supplies continue to rise. The International Energy Agency said inventories hit about 3 billion barrels in September and that the global demand for oil will slow down in 2016.

Oil prices slid $1.01, or 2.4 percent on Friday, to $40.74 a barrel. It has dropped about 13 percent this month and is at its lowest price since late August. OIl has dipped as low as $37.75 this year.

In response to the low commodity prices, energy companies are cutting back.

Since September drillers have idled more than 100 rigs, and Baker Hughes, the Houston oilfield services company, reported Friday that the number of rigs exploring for oil and natural gas dropped to 767. A year ago, with oil prices about double the price, 1,928 rigs were active.

Some of the larger energy companies and oilfield service providers have been laying off workers to save cash. Conoco Phillips, Chevron, Baker Hughes and FTS International have reduced their workforces this year, according to Texas Workforce Commission records.

A chart indicated that the cumulative secured and unsecured debt among energy producers was $12.5 billion.

Steve Pezanosky, one of the firm’s bankruptcy attorneys, said that in some ways this down cycle “seems deeper” than the one in the 1980s because so many energy explorers and service companies are so severely leveraged, making it hard for them to get financing to stay afloat.

He pointed to a chart showing that the number of U.S. energy company bankruptcies has steadily increased since January, when only a handful were filed, to more than 30 in October. Another chart showed the cumulative secured and unsecured debt among energy producers was $12.5 billion.

Making matters worse, another chart indicated that second lien debt was growing in prominence. Bankrupt Quicksliver Resources in Fort Worth, for example, has $825 million in second lien debt, a factor that makes it hard for investors with cash to step in and offer help.

“Better days may be a couple of years away,” Pezanosky said.

This report includes information from the Associated Press and Bloomberg News

Max B. Baker: 817-390-7714, @MaxbakerBB

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