Energy issues
A recent U.S. Energy Information Administration report projects that Gulf of Mexico oil production will hit an all-time high of 1.91 MMbpd in December 2017. That’s 210,000 bopd higher than the previous record of 1.7 MMbopd set in 2009. This projection followed a Feb. 18 announcement that the Bureau of Ocean Energy Management will offer 45 million acres in two lease sales on March 23. I doubt BOEM will get a large response, but the possibility exists, and with it the chance of even more crude entering the market.
This all dovetailed nicely with a previous report from the Deloitte Center for Energy Solutions (The crude downturn for exploration and production companies: One situation, diverse responses, John England, February 2016). The report notes that 35 U.S. E&P companies filed for bankruptcy between July 1, 2104, and December 31, 2015, with the majority coming in the second half of 2015.
The report identifies five options to cope with the worsening financial crisis. These are:
- Submit. File for bankruptcy. Of the 35 companies that have filed for bankruptcy since July 2014, more that 80% are still operating under the control of lenders or bankruptcy judges. However, the majority of these bankruptcies were approved in early 2015, when oil prices were in the $55-to-$60/bbl range. Going forward at $30 oil, the bankruptcy provisions will be harder to sustain for most bankrupted companies. And it is likely that significantly more bankruptcies will occur in 2016.
- Borrow. It is becoming increasingly difficult to obtain funds through traditional borrowing from banks. Starting in mid-2015, banks began making cuts to the borrowing base of many companies. The companies have responded by:
- Seeking funds from private equity firms.
- Sharply cutting capital expenditures.
- Converting unsecured loans from non-bank lenders to second-tier debt.
- Selling undeveloped assets.
- Venture. Another mechanism to deal with the current and projected low-oil-price environment is to take on risk, either by purchasing assets or through hedging, in anticipation of a timely oil price recovery. In the first (buying) scenario, reasons given by venturers fit into three categories: entering in select, oil-heavy shale plays; betting on future growth with a strong drilling inventory; and increasing scale, financial flexibility and access to capital.
With regard to hedging, entering 2016, U.S. companies with a speculative grade rating, and those rated “B” or lower by S&P have fewer hedged positions than in 2015. The pressure from banks to have reliable cash flows and lower hedge volumes, creates a complex question. Do companies hedge in case there is a marginal price recovery? A mistake on either of these options could kill the company.
- Adjust. Changing the way you run your business by making capex cuts, asset sales, equity issuance and lower dividend distributions can mean the difference between survival and disaster to many companies. Two-thirds of the savings, according to Deloitte, have come from non-capex measures, such as issuing equity and conducting asset sales. Thus far, dividend issuance has remained fairly sacrosanct, although that is not likely to be the case going forward.
- Optimize. Starting in 2014, U.S. companies began lowering lease operating expenses and production taxes. Currently, about 95% of U.S. production is operated below $15/BOE, as opposed to 65% in second-quarter 2014. Reductions in the gas sector (29%) have exceeded those in the oil sector (25%).
According to the Houston Chronicle, Marathon Oil and Ultra Petroleum are using these options. For Marathon, which reported an adjusted net loss of $869 million for last year, the option of choice was “adjust.” For full-year 2015, the company’s capital expenditures came in $500 million below original budget. The company also:
- Decreased E&P production, and adjusted general and administrative expenses by more than $435 million, or 24% year-over-year.
- Completed a 20% reduction in its workforce to save $160 million in annualized net capital.
- Reduced quarterly dividends (something most companies have resisted) to increase annual free cash-flow by more than $425 million.
- Closed or announced non-core asset sales of approximately $315 million.
These are all “adjust” moves. Marathon was able to make them and end the year with $1.2 billion in cash, and an undrawn $3-billion revolving credit facility.
For Ultra Petroleum, which topped out at nearly $100/share, but whose stock traded at less than $0.40/share last week, the only option, it appears, is to “submit.” The independent reported a $3.2-billion loss last year from a $3.1-billion asset write-down (adjusted net loss was $39 million). Ultra asked for help from its creditors in January, but as late as Feb. 22, had not received a response. For the heavily leveraged independent, few options remain other than “submit.” The company is $3.39 billion in debt, with debt actually rising $12 million last year, according to Garland Shaw, SVP and CFO.
The bottom line is that Marathon is in no immediate danger, but Ultra may go down like the Titanic, unless it can pull off the unlikely trick of finding another source of money. However, if oil prices don’t recover in a reasonable time-frame, few companies will be excused from the danger of a similar crisis. 
