Oil, Gas May 'Slingshot' Up After Credit Freezes Rigs
Source: Bloomberg, David Wethe††(4/8/09)
"The U.S. rig count has plunged by almost half."
Producers cut capital budgets 17% this year after demand slowed and prices plunged, according to Tristone Capital Inc.
"Quite frankly, they donít have the credit, which exacerbates the problem that their revenue stream is far below the cost structure," said Jud Bailey, an analyst at Jefferies & Co. in Houston. "They're not jumping on lower service costs simply because they can't. They're literally stepping away from anything they're not contractually obligated to."
The result may be a "slingshot" effect as spending cuts leave a supply shortage once demand returns, Bailey said. The number of active drilling rigs worldwide has fallen 35% from the 23-year high reached in September, according to Baker Hughes Inc. The U.S. rig count has plunged by almost half.
The credit crunch sets the current drilling slump apart from the slowdowns of 1997-1998 and 2001-2002, said James Wicklund, chief investment officer at Carlson Capital LP in Dallas. Exploration and production companies have more to consider than waiting for costs to come down, he said.
"The problem is instead of just waiting them out, they don't have the credit markets to rely on this time to reaccelerate their drilling," Wicklund said. "Before it was like, 'OK, I'm going to wait until you drop prices by 20%, then I'm going to swoop.' This time, the E&P companies have to live within cash flow."
Just about all producers will be affected by the lack of available credit, regardless of how much debt they hold, said Subash Chandra, an analyst at Jefferies & Co. in New York.
"You'll find over the last several years, pretty much everyone has borrowed to grow," Chandra said. "Our industry on average has spent 130% of cash flow for a couple years in a row now. It's kind of standard procedure."
Even as service costs come down, making more projects look profitable on paper, some producers are too starved for cash or credit to ramp up drilling, said Wicklund of Carlson Capital.
"This is like all of a sudden, the price of Porsches has come down, but you lost your job," Wicklund said. "It's like, 'Oh, well that's great that service or Porsche costs have come down, but I still can't afford it.'"