Low-priced crude puts the squeeze on
Marathon Oil Corp. looks to sales of assets, while Ultra Petroleum faces urgent needs
At Houston’s Marathon Oil Corp., executives say deep pockets and plenty of assets to sell will help it cope with today’s cheap oil reality.
But at Houston’s Ultra Petroleum Corp., a driller without the luxury of Marathon’s size, there’s less cushion and more urgency. The company told investors it is looking to reach a deal with creditors to stave off bankruptcy, though executives didn’t sound optimistic.
Both of those local independent producers on Thursday outlined different ways they are dealing with an oil price that barely cleared $30 per barrel Thursday, after traders posted a daily gain of 11 cents to $30.77 per barrel.
Marathon Oil, which on Wednesday after the market closed reported a quarterly net loss of $793 million, is focusing on cutting spending.
For example, it will run only eight rigs — one of them part-time — in the U.S. and spend on other long-term projects as it has to. Forty-two percent of its funds will flow to the Eagle Ford Shale, with smaller amounts in Oklahoma and the Bakken.
“The story still is that they’re outspending their cash flow,” said Tyler Bradshaw, an analyst at Simmons & Company International.
Marathon Oil burned through about $460 million in cash in the final quarter of last year, according to its fourth-quarter results. While that might set off alarms at smaller businesses, Marathon has about $1.2 billion in cash remaining and $3 billion in shortterm credit it can draw on to absorb losses before it has to consider more drastic steps.
Still, analysts are concerned: More cash is leaving the company than is coming in.
Across all of 2015, Simmons & Company International estimated the company outspent its income by $2.4 billion, without factoring in asset sales. Across 2016, they’re projecting another gap in the high $700 millions. Analysts
at rival energy investment bank Tudor, Pickering, Holt & Co. are forecasting a 2016 shortfall of roughly $800 million.
Marathon executives stress they have already cut costs, and in 2016 they’re hoping to close any cash shortfall by selling off between $750 million and $1 billion in assets.
The company said its 2016 production will decline between 6 percent and 8 percent after adjusting for asset sales.
Capital budget slashed
The company’s capital budget has been cut to $ 1.4 billion, a 50 percent cut from 2015 and a 75 percent cut from 2014. The company already laid off 700 workers — roughly 20 percent of its force — in 2015 and has reduced the dividend from 21 cents per share to 5 cents.
On a call with investors Thursday, Marathon CEO Lee Tillman said the company may cut other outlays further if needed, though he didn’t get into specifics.
“There’s no doubt in the current environment that the balance sheet is our top priority,” Tillman said. A spokeswoman for the company declined to comment further.
Big quarterly loss
Across town, Houston’s Ultra Petroleum Corp. has been skirting bankruptcy after reporting a $3.2 billion loss in the final quarter of 2015.
The natural gas producer is mired in nearly $3.4 billion in debt after expanding its asset base in Wyoming in 2014.
Ultra Chairman, President and CEO Mike Wat- ford said he is trying to restructure the company’s debt — “so far unsuccessfully” — in order to avoid filing in bankruptcy court, but he conceded Ultra needs external assistance.
“All of our debt is unsecured,” Watford said. “We’re in a unique position. It’s not all that pleasant. We need some help from the creditors to get across the finish line.”
He said Ultra submitted a restructuring plan to its three main creditors in January, but he is still awaiting replies.
“We would’ve anticipated a response weeks ago,” he said.
While a compromise is still possible, it likely would’ve occurred by now, said Michael Scialla, an analyst at Stifel, Nicolaus & Co.
“I think it looks like bankruptcy is almost inevitable,” Scialla said. “It’s been a pretty long downward slide for them.”
Ultra was one of the premier energy stocks during the height of the shale gas boom in 2008 before the recession, Scialla said. The company traded for nearly $100 a share at the time. The stock sold for $50 a share in 2011, nearly $30 in 2014 and fell below $1 for the first time on Feb. 11. The sell-off continued Thursday, driving the stock down to 39 cents a share.
Ultra “fell in love” with the Pinedale shale play in Wyoming, Scialla said, which remains strong, although other shale plays have surpassed it. As recently as 2014, Ultra paid $925 million and gave 155,000 acres in the Marcellus Shale to Royal Dutch Shell in exchange for Shell’s natural gas field operations in Pinedale.
“They didn’t diversify quickly, used too much debt and got backed into a corner,” Scialla said. “It’s a sad story.”
The company recently hired Kirkland & Ellis as legal advisers and Rothschild and Petrie Partners as financial advisers. Such hires are harbingers of major restructuring efforts, Pearce Hammond, of Simmons & Company International, said in an analyst note.
“This illustrates the intractable balance sheet problems the company faces,” Hammond wrote, arguing that Ultra has a “very dire outlook” overall.
Looking to next winter
Watford said Thursday that putting assets up for sale wouldn’t do enough. He said the hope is to survive the current trough of low natural gas prices and start profiting again next winter.
This year’s relatively warm winter likely was the “last nail in the coffin” for Ultra, with reduced natural gas demand, Scialla said.
Watford said Ultra is reducing its capital spending in 2016 by nearly 50 percent from $500 million down to $260 million.
Nearly all of Ultra’s $3.2 billion loss came from a $3.1 billion write-down on the reduced value of its assets. Ultra’s adjusted net loss was $39 million. In the final quarter of 2014, Ultra reported a $210 million profit.
When asked about the potential to ramp up production down the line, a resigned Watford said, “I’m really not in the mood to talk about ramping activity.”