Oil drilling companies face collapse in Q2

Oil drilling companies face collapse in Q2

Friday, January 23, 2015 5:46 pm

* A Bloomberg report

An oil well

An oil well

Oil drillers will begin collapsing under the weight of lower crude prices during the second quarter and energy explorers who employ them will shortly follow, according to Conway Mackenzie Inc., the largest U.S. restructuring firm.

Companies that drill wells and manage fields on behalf of oil producers will be the first to fall after the benchmark American crude, West Texas Intermediate, lost 57 percent of its value in seven months, said John T. Young, whose firm led the city of Detroit through its 2013 bankruptcy.

Oil companies have slashed thousands of jobs, delayed billions of dollars in projects and dropped or scaled back expansion plans in response to the prolonged rout in crude prices. For oilfield service providers that test wells and line the holes with steel and cement, the impact of price reductions forced upon them by explorers will start to pinch hard during the second quarter, Young said Thursday.

“The second quarter is going to be devastating for the service companies,” Young said in a telephone interview from Houston. “There are certainly companies that are going to die.”

Oilfield-service providers are facing a “double-whammy,” he said. Even as oil companies are demanding 20 percent to 30 percent price reductions, they’re also extending wait times before paying their bills, enlarging cash-flow gaps for the drilling and equipment firms, he said.

Squeaky Wheels

Young, who has restructured more than a dozen energy companies and advised Kirk Kerkorian’s Delta Petroleum Corp. through its 2011 bankruptcy, is warning drillers to monitor whether the oil producers they work for have protected future cash flows with hedging instruments like swaps and collars.

The amount of projected 2015 oil and natural gas output a company has hedged is a strong indicator of whether they’ll be able to pay their bills, he said. Another important metric is how much is drawn on revolver loans, Young said.

“I’m telling them they really have to keep an eye on this stuff and you’ve got to be the squeaky wheel,” he said. “You’ve got to start filing liens if you see a company starting to go down.” In the U.S., a lien is a legal claim against a debtor’s property to force payment of a delinquent bill.

West Texas Intermediate, or WTI in oil-patch parlance, fell 3.1 percent to $46.31 a barrel Thursday in New York. The price has been below $70 since the beginning of December and touched a 5 1/2-year low of $44.20 on Jan. 13.

“When I saw WTI hit $65, I thought we’re going to be really busy with restructurings,” Young said. “When it hit the $40s, I knew we were looking at outright liquidations.”

-Joe Carroll, Bloomberg

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