A year later, oil patch resilient
Wall Street money keeps the industry from crashing
The oil price collapse that began on June 20, 2014, has claimed thousands of jobs, shut down hundreds of rigs and forced U.S. producers to rethink how they approach bountiful shale plays.
But the financial hit to oil companies’ balance sheets has been far less dramatic this year after a multibillion-dollar bailout from Wall Street. Investors have poured billions into U.S. oil producers this year in a high-stakes bet that the price of crude — and the industry — will rise again.
And all this for a debt-laden industry that should have foundered after the oil market crash that began a year ago, when the U.S. oil benchmark started a long descent from last year’s peak of $107.26 a barrel to this year’s nadir of $43.46 in March. It has more recently been stable around $60.
The oil bust of the mid-1980s wiped out plenty of Texas oil companies when capital evaporated, and some analysts last year predicted a good chunk of the shale business would go under in a prolonged slump.
That could have happened,
but it didn’t.
“After the first of the year, the sentiment was, ‘batten down the hatches,’ because it was going to be a tough year,” Michael Moore, CEO of Gulfport Energy Corp. in Oklahoma City, said in an interview last week.
“But what actually happened was investment bankers found a way to reassure companies they could go to the market,” he said. “Quite a few companies raised money for no real purpose other than shoring up their balance sheets, or just because they could — because investors were open and generous.”
In a recent four-day hustle through Europe, Moore saw why. Investors are intensely curious about the business, and they have a sense of optimism.
In the bustling financial beehive of Geneva, wellheeled financiers drilled Moore about his American oil and gas company some 5,000 miles away, rattling off questions from a stack of typed pages, more engaged than many of the investor groups he has ever met.
But it was the investors’ optimism about the U.S. petroleum business that was most striking — the same optimism that lately seems to be in great supply on Wall Street and among private investors. Some are turned away
North American oil producers raised $13.7 billion by issuing new shares to investors in 30 separate offerings this year, often in overnight deals in which they had to turn away some of the investor crowd they couldn’t accommodate. Tens of billions more have been raised in public debt offerings and collected by private equity firms, either to fix balance sheets or to eventually be deployed to the oil field.
In interviews, oil company chief executives, investment bankers and other financial experts said the wave of money from capital markets has so far held off the worst of the downturn for the U.S. oil producers, saving all but the weakest companies from crushing debt, draconian bank exams in April, and the choice between bankruptcy and selling out.
And now, more oil companies are tapping markets to boost their drilling activity, rather than wiping debt off their books. Energen Corp. last week shored up $405 million for that purpose, and Cimarex Energy Co. last month raised $750 million to do the same. Moore’s company, Gulfport Energy Corp., has collected $1.4 billion this year, raising equity and debt to buy new acreage for it to drill.
The most recent stock sales could signal that oil companies are planning to ramp up their drilling activity in the second half of the year, said Ira Green, an investment banker at Simmons & Company International.
“The sector is pretty resilient,” Green said. “We haven’t seen many Chapter 11 filings. We could see more balance-sheet improvement, but a lot of that has already worked its way through the system.” Few defaults ahead?
Five U.S. oil producers have filed for Chapter 11 bankruptcy protection so far. And unless oil prices sink deeper, it’s likely only another handful of small oil companies will default on their debt this year, and that’s not going to leave much of a dent in the shale business, said Scott Roberts, a financial adviser at Invesco.
When oil was crumbling late last year, investors yanked billions out of oil and gas producers, selling off shares and looking for other places to park their cash. But when it looked like oil prices might have fallen as far as they were going to fall, the flood of cash came back. Why money flowed in
The Federal Reserve’s low interest rates meant the only real action to be had in the financial markets were in the battered sectors that might come back from a fall. There was really only one: energy.
“There has been a lot of money on the sidelines wanting to invest in energy; it was the only sector facing distress,” said Dean Burke, vice president of capital markets at investment banking firm Tudor Pickering Holt & Co. in Houston.
The amount of money coming in “is just crazy,” and it’s reverberating in oil-rich regions that have been otherwise economically slammed after drilling rigs and jobs were cut, said Rick Jennings, CEO of Midland-based Atlantic Resources Co.
Traffic is lighter in West Texas near the Midland Basin, where Jennings’ company drills, but prices for prime land there have held steady or even risen, hovering generally around $25,000 an acre through the oil slump, he said. That’s vastly different from the bust 30 years ago, when land values plummeted after the oil collapse, Jennings said. “We just shake our heads.” Far different from ’80s
In Houston, the economic ingredients that made the 1980s so bad were very different this time around, with a far more diversified economy than back then, and though 2015 could be a tough year in the local job market, the city isn’t likely to fall into recession this year, said Jesse Thompson, a business economist at the Houston branch of the Federal Reserve Bank of Dallas.
Outside Houston, the Texas economy is starting to show signs of improvement in the second quarter, the Dallas Fed said in a publication last week.
The state’s employment levels grew by 1 percent in April, after a slight dip in March.
“Is the worst behind us?” Thompson said. “It depends on what part of the state you’re in. In some parts, you’ve already felt what you’re going to feel. There are parts of West and South Texas where that isn’t true. Houston, I think, is in the midst of the worst of it now.” ‘No real panic’
For John Jacobi, who began a petroleum career decades ago as a roughneck and roustabout in high school, the oil market crash that began 12 months ago felt like the mid-1980s bust all over again. At least, it did at first. A year later, it doesn’t anymore — not even close.
“There’s no real panic of any kind today,” said Jacobi, who is now co-CEO of Dallas oil producer Covey Park Energy. “$60 a barrel seems to be where the market wants it to be. Companies are beginning to live with that.”
The question now, though, is how long can investors live with $60 oil? Much of the new money flowing into the energy sector has come from generalist investors who have baked in a crude price recovery into oil company stock prices, financial experts say.
And if equity markets close to the oil explorers by the fall, when banks perform their second semiannual review of how much money they should be allowed to borrow, the banks will be more heavy handed, Burke said.
“I’ve never experienced a period where there was such a dramatic drop in the commodity price and so much capital came rushing into the space,” Carl Tricoli, a managing partner of private equity firm Denham Capital, which has its main offices in Boston, Houston and London.
“But if you go into 2016 and prices are lower, I don’t think you’re going to see that again,” he said. “The equity markets at that point will probably be a little burned.” Role of modern CEOs
Moore, the Gulfport Energy chief executive, said the bulk of his time is spent traveling and visiting investors, in New York or Europe, or speaking at conferences, networking with prospective and current backers.
The modern CEO of a publicly traded oil and gas company doesn’t much resemble the fiercely independent wildcatters of old. The oil industry’s more recent connection to Wall Street helped stave off the worst of the crude price collapse, at least so far. The oil bust only made that connection more important.
“We were thrust into the spotlight,” Moore said. “They want access to management and they want to sit across and ask oneon-one questions. People don’t invest blindly, which I think is a difference from the 1980s.”