OIL OR BUST
In the race to frack, few carefully weighed tthe financial risks
TILDEN, Texas — He’d borrowed from banks and investors and retirement funds, all in a frenzied mission to drill for oil and gas, and by the time Terry Swift realized he’d gone too far, thiswas his debt: $1.349 billion.
His company, founded by his father almost 40 years earlier, had plunged into bankruptcy and laid off 25 percent of its staff. Its shares had been pulled from the New York Stock Exchange. And now Swift was in a company Chevrolet Tahoe, driving back to the place where his bets had gone bust.
Swift, 60, was going to this energy-rich strip of South Texas trying to grapple with how much blame he shouldered for the failure of his company. A lowkey and historically cautious oil chief executive, he had made what he thought was the best financial move of the past decade — a gamble on rising oil prices — and yet he was ensnared in an industrywide craze of dangerous debt.
“Maybe we were wrong to believe there wouldn’t be a bust this bad,” Swift said.
Swift’s miscalculation has made his company, Swift Energy, a casualty of the greatest wave of financial defaults since the subprime mortgage crisis ravaged the U.S. economy. For him, it’s a painful low point in his family’s 111-year journey in American oil, one that started when his great-grandfather set up a series of storage tanks in the plains outside Tulsa.
And it’s a jarring reversal from just a few years ago, when Swift felt as if he’d taken his company to a pinnacle by capitalizing on a massive surge in U.S. energy production — one that promised an era of “Maybe we were wrong to believe there wouldn’t be a bust this bad,” says Swift. American energy independence thanks to revolutionary new technologies.
This new wave of bad loans isn’t of the same magnitude as the housing bust, but it reflects similar behaviors. Borrowers feasted on what Bloomberg estimates was $237 billion of easy money without scrutinizing whether the loans could endure a drastic downturn. The consequences are far-reaching: The U.S. oil industry, having grown into a giant on par with Saudi Arabia’s, is shrinking, with the biggest collapse in investment in energy in 25 years. More than 140,000 have lost energy jobs. Banks are bracing for tens of billions of dollars of defaults, and economists and lawyers predict the financial wreckage will accelerate this year.
South Texas, along with North Dakota, had been the testing grounds for the industry’s ambitions, a place where shale oil and gas companies had taken on billions in loans to support more drilling and hydraulic fracturing, or fracking. The strategy was to gather up drilling sites at turbo speed and later slow down and reap the benefits. But then oil prices plunged. They have fallen 60 percent from two years ago.
“It was drill, drill, drill,” said Fadel Gheit, an analyst at Oppenheimer, an investment bank. “Every Tom, Dick and Harry was trying to become an oil baron. Now all of a sudden you say, my God — all these people spent beyond their means.”
America’s energy boom resulted not simply from gains made by the established giants but rather fromthe rise of hundreds of smaller companies. And those smaller companies grew with debt, using it to drill 8,000 feet into Earth’s crust and 10,000 feet across, renting equipment, pumping in millions of pounds of sand and creating fractures that released oil and natural gas. This was fracking, the technology that, in the middle of the last decade, allowed companies to reach oil and gas previously inaccessible. Companies had a choice — borrow to enter the fracking race, or stay on the sidelines and risk losing out. Most, including Swift, chose to frack.
That decision, multiplied across hundreds of producers, has nearly doubled U.S. oil production since 2007. And while politicians and executives celebrated that new capacity, few discussed the dangerous financial risks.
The industry’s debt, after all, had also nearly doubled. Producers such as Swift didn’t think this was a bubble: Instead, they saw a new chapter in American energy — one in which technology had helped expand the market permanently at a time of global energy needs, led by China.
“Not that the industry was bust-proof, but the cycles maybe wouldn’t be as deep,” Swift recalled. It was a profoundly wrong call.
Before fracking, Swift Energy had been a medium size player— operating conventional oil and gas wells in Louisiana and Texas. As the company began to frack more often, the amount it spent on exploration and drilling skyrocketed by hundreds of millions of dollars. Not long after, cracks began to show in Swift Energy’s plan.
Swift tried to perform triage. Running out of cash, Swift realized his company was bound for bankruptcy.
When Swift emerges later this year from a lengthy federal court process in Wilmington, Del., Swift will still be chief executive. But the company will be owned by bondholders.
Swift doesn’t even know whether the company will retain its name.