By Alison Sider
HOUSTON--A global economic slowdown has prompted a moderation in
crude prices, leading many U.S. oil companies to outspend their
cash flow as they move their rigs from unprofitable natural gas
areas to oil-rich formations that are expensive to drill. If prices
keep at the current level for an extended period or fall further,
they may have to sell assets, borrow more, or dial back their
ambitions, analysts say.
"Everybody is doing this 180 degree turn into liquids. What if
prices go down? It will rain on their parade and cool enthusiasm
significantly," said Fadel Gheit, an analyst with Oppenheimer &
Co.
The most prominent company caught in this dilemma is Chesapeake
Energy Corp. (CHK), where funding and governance issues led to a
successful revolt by shareholders calling for more restraint in
spending. The company reports quarterly earnings Monday. Others on
analysts' radar are Quicksilver Resources Inc. (KWK) and Exco
Resources Inc. (XCO).
Quicksilver has said it plans to sell some of its Barnett Shale
assets into a master limited partnership and will use the proceeds
to reduce debt. Rival Exco, based in Dallas, last week announced it
cut its workforce by about 300 people in a bid to reduce costs--and
to keep its debt ratio in line with the covenants struck with
lenders. The company at the end of last year had 23 rigs operating,
and now expects to end this year with seven to nine; the company is
also trying to unload some of its conventional gas assets, and has
discussed for several months plans to sell its midstream
subsidiary, TGGT.
But asset sales are not so simple--especially when everybody is
putting properties on the block at the same time. They may take
longer than expected or bring less money than thought.
"In the asset market it's a buyer's market," Jefferies & Co.
analyst Subash Chandra said. "Buyers are becoming more
sophisticated, more experienced and more jaded, if you will."
The dilemma underscores a fundamental challenge in the nature of
the energy industry, which must mobilize billions of dollars in
long-term investments that can quickly turn unprofitable if market
conditions change. At the end of the second quarter, when the
economic slowdown became evident, oil prices that had been
averaging above $100 per barrel fell sharply; after dropping below
$80, they rebounded to around $90 per barrel last week-- but still
tend to swing wildly as concerns about the euro-zone crisis or U.S.
and Chinese economic growth make investors jittery.
Also, an unexpectedly quick rise in U.S. oil production is
itself contributing to the weakness in prices. Hydraulic fracturing
and horizontal drilling--tchniques used to unlock previously
inaccessible natural gas and oil in shale formations--has led to
the highest domestic crude production levels since 1998.
The federal Energy Information Administration estimated that on
average, more than 6.2 million barrels of oil a day were produced
in the U.S. during the first quarter of 2012. That's up 12% from a
year earlier and 22% from the first quarter of 2006.
Even large companies are feeling the pinch of market volatility:
ConocoPhillips (COP) cut its share buyback program and is
outspending cash flow to pay for its ambitious drilling program and
its dividend, and Marathon Oil Corp. (MRO) said last week it would
reduce drilling expenses.
"We could continue to maintain higher rig levels and grow
volumes at a faster rate," Marathon chief executive Clarence
Cazalot said, but "we don't see that makes a great deal of
sense."
One point in favor of oil and gas companies: lenders seem to be
flexible when discussing debt covenants with oil companies because
they are bullish about energy. They proved to be understanding in
2009, when natural gas prices plummeted in the wake of the
financial crisis.
"When gas prices got low, I expected lenders to apply more
pressure but just didn't see it," said Pearce Hammond, an analyst
with Simmons & Co. "Thus far, the banks have been very
supportive." As long as prices don't dip below $85 per barrel for
long stretches of time, most producers should be all right, Mr.
Hammond said.
Also, so far, even though several companies have announced
write-downs of the value of natural gas assets, Tudor Pickering
Holt analyst Brian Lively said he would not expect to see the same
happen for oil assets, as crude prices would have to stay low for
an extended period of time.
Write to Alison Sider at alison.sider@dowjones.com
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