Oil slick

The mood was somber at the Independent Petroleum Association of America’s Private Capital Conference at the Houstonian Hotel in Houston in mid-January, where oil and gas executives gathered to discuss the state of the industry. There was a lot of talk of opportunity but not a lot of talk of available financing to expand companies, much less do deals.

“It’s not like anything I’ve ever seen in my career,” said Charles Hall, a managing director in the energy section of ING Capital LLC. “Last summer there was too much capital and too little opportunity. But ultimately there was a day of reckoning, and that’s what we’re going through right now.”


The energy industry, like the rest of the economy, is suffering from the double whammy of lower commodity prices and sapped credit. Oil prices have fallen 70% from a record high of $147 per barrel in July to a four-year low of less than $33 per barrel in January. Natural gas prices have performed even worse, plummeting from a high of more than $13 per thousand cubic feet equivalent this past July to less than $5. By the end of January, rig counts in the U.S. had declined by 25% since their peak in September, to 1,515. At the same time, credit has disappeared from ailing and gun-shy banks, forcing oil and gas companies to cut capital budgets and lay off staff.

Last month, Houston oil services giant Schlumberger Ltd. announced it would let go 5,000 employees, or 6% of its workforce around the world. ConocoPhillips followed suit, saying Jan. 16 it would cut its capital budget by 18%, to $12.5 billion, and lay off 4% of its workforce, or 1,350 people. It recently reported a $31.8 billion loss in the fourth quarter of last year.

Smaller oil and natural gas companies are also struggling. The debt markets have slammed shut for many of them, and analysts are concerned that several companies will trip their loan covenants this year, including Forest Oil Corp., Chaparral Energy Inc., Berry Petroleum Co., Energy Partners Ltd., Petro Resources Corp., ATP Oil & Gas Corp., Crimson Exploration Inc. and Parallel Petroleum Corp. “It really feels like the 1980s,” an investor relations chief at a large exploration and production company said recently.

If oil and gas prices continue to stay low and credit remains tight, oil and gas companies may find themselves so strapped for cash that they’ll start filing for bankruptcy. Indeed, bankruptcy attorneys say they began getting calls in November from creditors worried about getting paid by potential debtors. They say the calls haven’t stopped.

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