Drillers adrift in a sea of cheap oil
Can the industry, which accounts for 11% of GDP, hang on?
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.
An oil- field worker starts his day’s work before the sun rises over an oil rig near Kersey in 2014.