Oil price slide puts producers under pressure
Natural gas is flared off at a plant outside of the town of Cuero, Texas. Texas, which in just the last five years has tripled its oil production and delivered hundreds of billions of dollars into the economy, is looking at what could be a sustained downturn in prices. Crude oil prices today are almost 60 percent lower than they were six months ago.While the Texan economy has become more diversified over the years, oil is still the states largest monetary generator and any sustained downturn would be devastating for employment and the economy. Outplacement firm Challenger, Gray & Christmas this month said a drop in oil prices have been responsible for 39,621 job cuts in the first two months of the year. (Photo by Spencer Platt/Getty Images)©Getty
The oil price plunge has triggered a string of bankruptcies, debt defaults and rescue measures to save companies nearing collapse, with almost two dozen oil and gas groups now under stress.
A 40 per cent slide in Brent crude prices from a peak of $115 a barrel last June, has put smaller, cash-strapped producers in financial trouble, according to City analysts, with up to a quarter of a million barrels a day of oil supply at risk of being curtailed.
Even after a rebound in prices from January’s lows to about $66 a barrel, there have been “numerous small corporate casualties” across the globe, and especially in the US and Canada, says a report by Bernstein Research.
It has identified 22 companies “under duress” from lower oil prices, with $33bn of assets, including eight that have filed for bankruptcy protection and others warning of insolvency or deferred interest payments on bonds.
A dozen of the groups identified by Bernstein had their production assets in North America, with the rest spread across South America, Europe and the Asia-Pacific region. Their total output was put at 383,000 barrels of oil equivalent a day, of which 239,000 b/d was oil and the rest gas.
The fallout from the price slide has yet to match that which followed the 2008-09 collapse, when 61 companies filed for bankruptcy. However, those groups were much smaller than the energy producers which are now struggling to meet obligations to lenders amid dwindling revenues.
Bernstein’s Oswald Clint said that similarities with the 1980s supply-driven slump, and uncertainty over the scale of any price recovery, made companies more vulnerable than in 2008-09.
“There are a lot of differences between this downturn and the last one. The most important is that the last recovery was rapid, much quicker than the industry could react. There is greater perceived uncertainty of where we are in the cycle today,” he said.
Five years ago, the consequences of the price plunge were limited by the rise in US production that heralded America’s shale boom. This time, those higher cost shale resources make up a much bigger proportion of US output. Most of the casualties this time round are in the US and Canada where the tumble in crude has hit oil sands producers hard.
They include little known companies such as shale gas producer Quicksilver Resources, WBH Energy and Southern Pacific Resources, which have filed for bankruptcy protection.
Larger players such as Samson Resources, another shale producer, have warned investors of possible default, while UK-based Afren has delayed payment of interest to bondholders and Gulf Keystone, the Kurdistan producer, is in talks over a possible sale of assets or the company.
John Gerstenlauer, chief executive of Gulf Keystone, said the group, which was owed more than $330m by the Kurdistan authorities for its share of oil sales, said it was burning through cash at the rate of $8m to $10m a month.
“For us, it’s a matter of keeping our heads above water until the Kurdistan situation improves. We’re trying to live within our means and generate enough income to cover that,” he said. The company had slashed capital and operating expenditure.