Drillers adrift in a sea of cheap oil

Can the in­dus­try, which ac­counts for 11% of GDP, hang on?

The Denver Post - - FRONT PAGE - By Aldo Svaldi

The col­lapse this month in oil prices can’t help but un­leash some primal fears for any­one who was in Colorado dur­ing the mid- 1980s.

That’s when the state suf­fered a re­ces­sion so se­vere that it hol­lowed out down­town of­fice build­ings, trig­gered the fail­ure of sav­ings and loans and drove thou­sands to leave for bet­ter op­por­tu­ni­ties else­where.

En­ergy- pro­duc­ing states such as Colorado and Texas lagged other parts of the coun­try as the af­ter­math of de­pressed prices played out for years.

The pe­tro­leum sec­tor isn’t as dom­i­nant in Colorado now as it was back then. But a near qua­dru­pling in oil pro­duc­tion the past five years gave the state econ­omy a push com­ing out of the re­cov­ery that is now gone.

“En­ergy is 11 per­cent of Colorado GDP and is a crit­i­cal part of our eco­nomic suc­cess,” said Kelly Brough, pres­i­dent and CEO of the Den­ver Metro Cham­ber of Com­merce, which is watch­ing the price slide with con­cern.

Ma­jor Colorado drillers have di­aled back their cap­i­tal ex­pen­di­tures to fo­cus on more cer­tain plays north of Den­ver, but even com­pa­nies with the tight­est belts may be forced to shut wells and let work­ers go if low prices per­sist.

Ad­just­ing for in­fla­tion, oil pric----

es are back to de­pressed lev­els reached 30 years ago, al­though re­vis­it­ing the 1986 low would re­quire a drop below$ 22 a bar­rel at to­day’s prices.

West Texas In­ter­me­di­ate crude, a bench­mark for do­mes­tic sup­ply, got as low as $ 26.55 a bar­rel on Wed­nes­day, be­fore re­bound­ing above $ 32 a bar­rel Fri­day and clos­ing at $ 30.34 on Mon­day.

“My take on this oil price slide is that prices will con­tinue to fall un­til we see a shake­out,” said Mark Vit­ner, a se­nior econ­o­mist at Wells Fargo, which re­cently up­dated its out­look for the Colorado econ­omy.

Con­cerns of a slow­down in China have pushed com­modi­ties of all stripes lower, pres­sur­ing Colorado min­ing firms, farm­ers and ranch­ers as well.

“The state will likely en­dure ad­di­tional cut­backs in the en­ergy, agri­cul­ture and min­ing sec­tors, as they all ad­just to lower com­mod­ity prices,” Vit­ner pre­dicts.

On the plus side, Colorado’s econ­omy is much more di­ver­si­fied than it­was three decades ago, and, as a trip to any gaso­line pump con­firms, en­ergy con­sumers stand to reap some ma­jor sav­ings.

But what­ever Colorado might gain from oil and gas prices this low are far out­weighed by what it will lose, Brough said.

Oil prices are down by nearly three- quar­ters from the $ 107- a- bar­rel pin­na­cle they reached in June 2014. The drop has been so se­vere that most wells across the U. S. now op­er­ate at a loss, and drilling ac­tiv­ity risks grind­ing to a halt.

“Oil is now down to a level where 90 per­cent of it doesn’t make money,” Shaia Hos­sein­zadeh, man­ag­ing di­rec­tor of WL Ross, a pri­vate equity fund, said on a re­cent con­fer­ence call.

As re­cently as 2010, Colorado’s oil pro­duc­tion vol­umes were run­ning about 30 mil­lion bar­rels a year, around where they were 25 years ear­lier.

But a drilling boom in Weld County pushed the state’s oil pro­duc­tion up nearly four­fold the past five years, un­leash­ing a wind fall of high- pay­ing jobs, cap­i­tal in­vest­ments and roy­alty and tax pay­ments.

What hap­pens in the Den­ver- Jules­burg basin north­east of metro Den­ver will be crit­i­cal to de­ter­min­ing the im­pact lower prices will have on the over­all state econ­omy.

Pon­derosa Ad­vi­sors, a Den­ver re­source ad­vi­sory firm, ex­am­ined the 11 com­pa­nies most ac­tive in the D- J Basin to mea­sure their odds of sur­viv­ing this tough price en­vi­ron­ment.

Hous­ton- based-Noble En­ergy, the state’s sec­ond­largest pro­ducer, has debt it must cope with, but its eco­nom­ics are “great” in the D- J Basin and it should re­main around for the long haul, said Sarp Ozkan, a se­nior en­ergy mar­ket an­a­lyst at Pon­derosa.

EOG Re­sources, also based in Hous­ton, may go quiet in the D- J Basin at th­ese prices. But fa­vor­able po­si­tions in other fields and pris­tine fi­nan­cials will per­mit EOG to ramp up again in Colorado when a re­bound comes, Ozkan said.

Conoco Phillips falls into the too- big- to- fail camp and should pull through, Ozkan said. The oil ma­jors weren’t at the fore­front of the shale drilling boom and aren’t as ex­posed as in­de­pen­dent pro­duc­ers.

Ozkan puts an­other group of com­pa­nies into the camp of sur­vivors, al­though their out­look could darken if prices go even lower and stay there for an ex­tended pe­riod.

Anadarko Pe­tro­leum Corp., based north of Hous­ton, will strug­gle to gen­er­ate enough cash flow and op­er­at­ing prof­its to fund its in­ter­est pay­ments, lim­it­ing its short- term fi­nan­cial flex­i­bil­ity.

But the state’s largest pro­ducer has the scale and fa­vor­able hold­ings in the basin to sur­vive at the cur­rent range of oil prices, Ozkan said.

Syn­ergy Re­sources and PDC En­ergy, both Den­ver­based, are much smaller oper­a­tors who also will have to tread wa­ter. But Syn­ergy has some lower- cost po­si­tions it can ex­ploit, and PDC car­ries much less debt than its peers, which will buy it time.

Cur­rent prices leave Den­ver­based Whiting Pe­tro­leum and Gree­ley- based Car­rizo Oil & Gas de­pen­dent on the mercy of their cred­i­tors, while Bill Bar­rett and Bo­nanza Creek En­ergy are in dan­ger un­less prices start climb­ing again, ac­cord­ing to Ozkan’s anal­y­sis.

Oil and gas pro­duc­ers in the U. S. and Canada bor­rowed more than $ 1.3 tril­lion to fund the now- ended drilling boom, ac­cord­ing to data provider Dealogic.

Repric­ing that debt in light of lower com­mod­ity val­ues will be painful.

Reg­u­la­tors have pushed banks for more than a year to keep a close eye on the loans they have­made to en­ergy firms, Vit­ner said.

Last year, bankers ap­plied a much lighter hand than ex­pected, but now they are plan­ning to set aside bil­lions of dol­lars in re­serves to ab­sorb de­faults.

Over­lever­aged firms will be pushed to sell their hold­ings to re­pay cred­i­tors — as­sum­ing they can find buy­ers — or may head into bank­ruptcy if they can’t.

“Sellers had some abil­ity to be picky and wait and bide their time for higher oil prices” last year, Hos­sein­zadeh said.“We are in a much dif­fer­ent place.”

U. S. en­ergy firms con­founded dire pre­dic­tions last year, pro­duc­ing more with fewer rigs and low­er­ing their break- even costs. That strat­egy in­volved con­cen­trat­ing on the most prof­itable plays, which for Anadarko and Noble meant the D- J Basin, moves that helped shield Colorado.

But ris­ing U. S. pro­duc­tion only added to the global glut, set­ting the stage for the lat­est down­ward move in prices. Those moves also ex­tracted a pound of flesh from oil- field ser­vice providers.

“Oil- field ser­vices are feel­ing the pinch. They are highly lev­ered. We will see more bank­rupt­cies and con­sol­i­da­tion,” said Steve Sprenger, an en­ergy eval­u­a­tion spe­cial­ist at RSMUS in Den­ver.

Sch­lum­berger Ltd., the gi­ant of oil- field ser­vice providers, said Thurs­day it had cut 10,000 jobs world­wide in the fourth quar­ter in re­sponse to a 35 per­cent drop in rev­enues. Hal­libur­ton Co., the se­cond- largest oil­field ser­vices com­pany, said it laid off 4,000 peo­ple in the same pe­riod.

The com­pany also warned that its cus­tomers were abruptly can­cel­ing projects and that it didn’t see things im­prov­ing be­fore 2017.

Al­though the large oil­field ser­vice firms aren’t head­quar­tered in Colorado, they have work­ers here who won’t es­cape the down­siz­ings.

And ever- weaker oil prices could fi­nally push pro­duc­ers that held out in hope of a re­bound to fi­nally start cut­ting staff in a big way.

Hous­ton- based South­west­ern En­ergy Co., which has some mi­nor hold­ings in north­west­ern Colorado, said Thurs­day it would lay off nearly half its work­force, or about 1,100 peo­ple.

The oil and gas in­dus­try has cut $ 250 bil­lion in in­vest­ment and let go of 250,000work­ers around the globe since oil prices peaked in June 2014, ac­cord­ing to Bloomberg.

Brough said the cham­ber and other eco­nomic de­vel­op­ment groups are study­ing what in­dus­tries can take in dis­placed oil and gas work­ers, preserving their skills for the day when dor­mant drilling rigs re­launch.

A lack of res­i­den­tial con­struc­tion work­ers, whose ranks were dec­i­mated fol­low­ing the hous­ing bust, came back to bite the re­gion hard via some of the sharpest home price and rent gains in the coun­try.

Ac­cord­ing to the Metro Den­ver Eco­nomic De­vel­op­ment Corp.’ s an­nual In­dus­try Clus­ter Study re­leased Thurs­day, 1,590 fos­sil- fu­els com­pa­nies di­rectly em­ployed 33,120 peo­ple in Adams, Ara­pa­hoe, Boul­der, Broom­field, Den­ver, Dou­glas, Jef­fer­son, Larimer and Weld coun­ties in 2015, up about 2.8 per­cent from the year be­fore.

Statewide, 38,650 peo­ple were di­rectly em­ployed by the oil and gas in­dus­try in 2014, ac­cord­ing to an in­dus­try re­port from the Univer­sity of Colorado.

That rep­re­sents a small sliver of the 1.4mil­lion peo­ple work­ing in the state. Given metro Den­ver’s low 3.2 per­cent un­em­ploy­ment rate, there should be room to ab­sorb dis­placed en­ergy work­ers, bar­ring a wider eco­nomic slump.

Main­tain­ing the qual­ity of life those work­ers have come to en­joy is an­other mat­ter. The oil and gas in­dus­try’s av­er­age pay of $ 105,000 was dou­ble the state’s over­all av­er­age.

RJ San­gosti, Den­ver Post file

An oil- field worker starts his day’s work be­fore the sun rises over an oil rig near Kersey in 2014.

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