[Graeme]

Oil prices hit struggling oil companies

Low oil prices are endangering an increasing number of exploration and production companies.

According to a new report from Moody's Investors Service, the oil and gas industry could see the rate of defaults rise over the next year. The companies in danger of going belly up, not surprisingly, are the ones that already have low credit ratings. Moody's finds that the default rate for oil drillers with a credit rating of B2 or lower could jump from 2.7% to 7.4% by March 2016.

Moreover, distressed oil companies make up a rising share of overall firms with a poor credit rating – roughly 14.8% of the companies with a B3 credit rating or worse covered by Moody's are in oil and gas. That is up sharply from the 8% share that oil firms accounted for in 2014.

The credit ratings agency also said that even if oil prices rise to $70 or $75 per barrel, the weakest firms probably won't be safe. Debt is piling up and banks are starting to restrict capital to drillers that are in the most trouble.

usatoday

[ROCKMAN]

Nothing new there: hundreds of companies disappeared after the oil price crash in the 80's. Most were never heard of again.

[Pops]

Come on G, f you're just going to post a link without any additional comment at least find an existing thread, there are 10 pages here
fallout-from-crude-price-crash-t70714.html

[Graeme]

ROCK, We're not talking about the 1980's, we're talking about now, i.e. current news.

Pops, If felt strongly enough that this thread should have been moved, why didn't you move it? The article was about about credit ratings not why there is a current decline in oil prices or it's consequences. Actually, ROCK raised an interesting point because we can compare what happened in the past with what is happening now. I found a reference that does just that:

Oil Price History and Analysis

The recent downturn in crude oil prices will as usual have the greatest immediate impact on the exploration segment of the industry. Coincident with that will be a decline in sales and manufacture of oil and gas equipment. The next segment of the industry to feel the pressure of the price decline will be the oil and gas services. This page will address the causes for the precipitous drop in prices in an historical context. If you find it of interest you might want to bookmark the page and check back often. We will be adding to this analysis on a regular basis. Of course, if you need help determining the impact on your company please contact WTRG Economics.


Impact of Prices on Industry Segments
Drilling and Exploration

Boom and Bust
The Rotary Rig Count is the average number of drilling rigs actively exploring for oil and gas. Drilling an oil or gas well is a capital investment in the expectation of returns from the production of crude oil or natural gas. Rig count is one of the primary measures of the health of the exploration segment of the oil and gas industry. In a very real sense it is a measure of the oil and gas industry's confidence in its own future.

At the end of the Arab Oil Embargo in 1974 rig count was below 1500. It rose steadily with regulated crude oil prices to over 2000 in 1979. From 1978 to the beginning of 1981 domestic crude oil prices exploded from a combination of the the rapid growth in world energy prices and deregulation of domestic prices. Forecasts of crude oil prices in excess of $100 per barrel fueled a drilling frenzy. By 1982 the number of rotary rigs running had more than doubled.

It is important to note that the peak in drilling occurred over a year after oil prices had entered a steep decline which continued until the 1986 price collapse. The one year lag between crude prices and rig count disappeared in the 1986 price collapse. For the next few years the towns in the oil patch were characterized by bankruptcy, bank failures and high unemployment.

After the Collapse
Several trends established were established in the wake of the collapse in crude prices. The lag of over a year for drilling to respond to crude prices is now reduced to a matter of months. (Note that the graph on the right is limited to rigs involved in exploration for crude oil as compared to the previous graph which also included rigs involved in gas exploration.) Like any other industry that goes through hard times the oil business emerged smarter and much leaner. Industry participants, bankers and investors were far more aware of the risk of price movements. Companies long familiar with accessing geologic risk added price risk to their decision criteria.

Technological improvements were incorporated:

Increased use of 3-D seismic data reduced drilling risk.
Directional and horizontal drilling led to improved production in many reservoirs.
Financial instruments were used to limit exposure to price movements.
Increased use of CO2 floods to improve production in existing wells.

In spite of all of these efforts the percentage of rigs employed in drilling for crude oil decreased from over 60 percent of total rigs at the beginning of 1988 to under 40 percent currently.

wtrg

[ROCKMAN]

"The recent downturn in crude oil prices will as usual have the greatest immediate impact on the exploration segment of the industry. Coincident with that will be a decline in sales and manufacture of oil and gas equipment. The next segment of the industry to feel the pressure of the price decline will be the oil and gas services."

Completely ass backwards. The first to take the big hit are the leasing brokers. Few outside the oil patch don't understand that leases are typically taken from mineral owners by this group of outside consultants. Even true for Big Oil like Exxon Mobil. My land woman's husband was such a lease broker. He and hundreds of others had their contracts cut in just weeks after the collapse began. Companies had more then enough leases in inventory...no need to lease one more acre.

The second big hit was the service companies. The current estimate is over 100,000 laid off and many dozens of companies shut down. As far as the exploration companies it may have happened but I have not personally heard of one company geologist or engineer being laid off. Yet.

[Graeme]

Yes you are meant to read everything I post. If you can't then I suggest you got back to school to learn to read. I don't have to make a commentary on every post - each is self-explanatory. Pops doesn't have to move this post because the theme now differs from the one he referred to.

ROCK, Any comment in these trends then?

The lag of over a year for drilling to respond to crude prices is now reduced to a matter of months.

In spite of all of these efforts the percentage of rigs employed in drilling for crude oil decreased from over 60 percent of total rigs at the beginning of 1988 to under 40 percent currently.

[rockdoc123]

As far as the exploration companies it may have happened but I have not personally heard of one company geologist or engineer being laid off. Yet.

lots in Alberta.

[Alaska_geo]

The second big hit was the service companies. The current estimate is over 100,000 laid off and many dozens of companies shut down. As far as the exploration companies it may have happened but I have not personally heard of one company geologist or engineer being laid off. Yet.

ConocoPhillips and BP have both definitely laid off geos and engineers in Anchorage (only small numbers so far). I've heard rumors BP is doing the same in Houston and the UK, though I can't say for sure.

[Cog]

Meanwhile consumers are getting a much deserved break in gasoline prices.

[ROCKMAN]

Graeme - The speed of the decline really is phenomenal. I survived the bust in the 80’. Actually I had a couple of my best years in 85-86. But it took years to get a bad as it has done recently in a matter of months. I suspect part of the reason is the huge debt load so many companies have now. In the 80’s cutting rigs did preserve capital that allowed some drilling to continue. But now I suspect much of the effort isn’t so much to preserve capital but redirect it to satisfying debt. Most companies, especially pubcos, have always relied on their borrowing base to fund capex projects. The quickest way to drive your borrowing base to $zero is to miss a loan repayment schedule. Despite low oil prices companies still have some credit…as long as they can continue to service their existing loans.

[ROCKMAN]

Geo - I suspect we'll start to see those bodies fall significantly come fall/winter here in Houston should prices stay this low. And what the public doesn't hear about is the consultant shops that are being cut lose. Consultants aren't employees so they don't get fired: one day they just don't show up. A consultant, in particular a geologist/geophysicist, is always working…even if no one is paying them at the time. When I was driving a Yellow cab during the beginning of the 80’s bust I was still a “geological consultant”.

There are many hundreds of such “free range” consultants in Texas today. LOL.

[Tanada]

Meanwhile consumers are getting a much deserved break in gasoline prices.

What did we consumers do to deserve such a break in gasoline/diesel fuel prices in your opinion?

[ROCKMAN]

T - "What did we consumers do to deserve such a break in gasoline/diesel fuel prices in your opinion?"

Easy answer: you paid very high prices (about 4X the historical average) for oil for a number years which allowed more drilling which resulted in more production which resulted in lower fuel prices. IOW you earned the privilege of paying around $2.70/gallon today by paying average price of $3.50/gallon over the last 10 years. And that compares to the under $2/gallon average from 1986 to 2002. IOW you earned the right to lower fuel prices by paying out the ass for your fuel for much of the previous 10 years.

You feel better now? Pay me now…pay me later. But you’re gonna pay me, sucker. LOL

[Alaska_geo]

Geo - I suspect we'll start to see those bodies fall significantly come fall/winter here in Houston should prices stay this low. And what the public doesn't hear about is the consultant shops that are being cut lose.

Rock - Consultant you say? Yeah, been there, done that. If my wife hadn't had a halfway decent job we would have been in deep poop, 'cause I sure wasn't making much money consulting.

Besides the company employee layoffs in Anchorage, quite a few contract and consultant types have been let go as well. However, overall the bloodletting here in Anchorage has been fairly mild.....so far.

[Outcast_Searcher]

Meanwhile consumers are getting a much deserved break in gasoline prices.

What did we consumers do to deserve such a break in gasoline/diesel fuel prices in your opinion?

I'll second that Tanada. Until consumers are paying roughly the FULL cost of oil products like gasoline, including (at a minimum) pollution damage, AGW damage, and the military costs of protecting oil interests, they are getting a big BREAK which they don't deserve, in my considered opinion.

[Cog]

Meanwhile consumers are getting a much deserved break in gasoline prices.

What did we consumers do to deserve such a break in gasoline/diesel fuel prices in your opinion?

I'll second that Tanada. Until consumers are paying roughly the FULL cost of oil products like gasoline, including (at a minimum) pollution damage, AGW damage, and the military costs of protecting oil interests, they are getting a big BREAK which they don't deserve, in my considered opinion.

In other words you want to punish people because of how successful oil companies are at delivering a product. Do I smell a tax and spend progressive?

[Cog]

*crickets*

[ROCKMAN]

Cog - It's always interesting to hear folks bitch about any part of the system that benefits the oil patch as though it ultimately doesn't benefit the consumers. Don't want the oil patch to get the depletion allowance tax break? Fine...less wells will be drilled so less jobs/production/taxes paid/etc. And, of course, less production which leads to higher costs and potential supply problems. And how does that benefit the public? Want to put a big "environmental tax" on the oil patch? Fine...since it will be done across the board the cost will either be passed on to the public or fewer wells will be drilled so less jobs/etc. Or let the commons bear the costs of the negative impacts: after all the consumers benefit much more from fossil fuel extraction than the oil patch. IOW the oil patch makes $X in revenue from the process. And how many, many multiples of $X is made by all the business that benefit from the consumption of fossil fuels?

So again I'll ask the simple question: everyone here who could still bring home a paycheck if we weren't producing fossil fuels give us a shout out.

'crickets' LOL

[Tanada]

*crickets*

I was waiting for your answer Cog, just because OS answered first doesn't mean your answer applies to both questions.