Posted on 11/11/2013 5:48:01 AM PST by thackney
By 2007, a century of drilling had drained the biggest U.S. sandstone reservoirs and sent oil and gas producers overseas to virgin lands.
Then a new combination of drilling techniques came into play, sparking a rush to amass as much once-abandoned American land as possible. Merging hydraulic fracturing and horizontal drilling, wildcatters blasted through tight rock formations that had fed the countrys sandstone with crude oil and natural gas for millions of years.
For the U.S. oil and gas industry, it meant wiping the map clean of its aging framework for producing from softer sandstone, and starting over.
The amount of capital that you need is almost unimaginable, said Carl Tricoli, managing partner at Denham Capital Partners, an oil and gas-focused private equity firm.
U.S. independent oil and gas producers seem willing to pay for it, and last year reached their highest average level of debt in more than a decade.
But investors, anxious over debt-laden balance sheets, have started to turn on the producers this year, at times balking at large compensation packages, throwing out managers and installing penny-pinching replacements.
Increasing debt loads
Massive capital requirements to scoop up new acreage and develop expensive drilling projects have driven the average debt-to-capital ratio among U.S. producers to 42 percent last year, its highest point in more than a decade, and up from 30 percent in 2007, according to Bloomberg data.
The ratio measures how much of a companys capital is debt.
Producers average debt load hit $3.2 billion in 2012, nearly doubling from $1.8 billion a decade ago.
Average debt rose 25 percent in 2011 alone, the largest annual increase since the financial crisis.
Also, exploration and production companies boosted new debt offerings 82 percent from 2011 to 2012, landing at a record $53.2 billion last year, according to an analysis by Barclays.
As oil kept flowing out of highly productive wells, the corporate debt market ate it up and sent capital to companies at a high velocity last year, said James Kipp, an investment banker at Wells Fargo.
Low interest rates pushed some companies toward debt offerings as high as $5 billion, and it wasnt uncommon to see companies boost these offerings by an additional $250 million to meet investor demand, Kipp said.
Now, philosophies have begun to change: Diversification in portfolios isnt the same hot ticket, and companies are focusing more resources on core areas, often selling off assets to reinvest in more profitable plays and to pay off debt, Kipp said.
The bill comes due
Though debt is used widely in the exploration and production sector, its a risky investment bet because its impossible to predict who will win or lose at the wellhead, and some investors worry companies are overstretched, said Michelle Foss, chief energy economist at the Center for Energy Economics at the University of Texas.
Sooner or later, the bill comes due, Foss said.
She said most of the problems with oil and gas companies cash management have been onshore at U.S. shale plays. Natural gas producers became the most vulnerable to high debt after the price of gas collapsed starting in late 2011, and many companies had to borrow heavily to finance a shift from gas to liquids.
If youre still weighted toward gas, you have problems, Foss said.
Changing course
Oklahoma City-based Chesapeake Energy, once among the most aggressive natural gas players, has cut 1,200 workers, slashed capital spending in half and downsized its rig count across the U.S., a sharp turn after investors pushed the company to pare down ballooning debt that reached $16 billion last year.
Apache Corp. has agreed to sell off more than $8 billion in assets this year, in part to pay down debt and reinvest in its more lucrative U.S. shale plays. The Houston company went to the sales block after shareholders rejected, in a nonbinding vote, Apache CEO Steven Farris targeted compensation package for 2013 which later was cut by $3 million.
And in June, Sand-Ridge Energy threw out its CEO and replaced him with the companys chief financial officer, James Bennett, who has promised shareholders a new direction to focus on financial discipline. The Oklahoma City-based producer cut its budget by $300 million this year.
Being better stewards of capital isnt something you talk about on the front end, but if youre a bad steward, you definitely see companies being punished and put in the penalty box, said Jason Wangler, an analyst with Wunderlich Securities.
More mindful of debt
Across the oil and gas industry, more companies are moving to pay down debt before taking other measures to boost shareholder value, like share buybacks and dividends.
Forty percent of surveyed U.S. oil and gas companies told Ernst & Young last month they would use excess cash to pay down debt over the next 12 months, up from 25 percent a year ago.
The percentage of companies that expect to decrease debt-to-capital ratios jumped to 48 percent in October, up from 31 percent a year ago.
Its not all shareholder activism, but there has been plenty in the industry, said Jon McCarter, a partner in transaction advisory services for Ernst & Young.
Some players are more sensitive to rising debt, especially as a growing amount of debt nears maturity. More companies are deciding something needs to be done, McCarter said.
It creates more of a focus on shareholder value, which they think is waning.
So... what’s the upshot of this? Companies won’t borrow (as much) to develop on-going/new projects? Leveling off or possibly even decline of oil produced from fracking?
But investors, anxious over debt-laden balance sheets, have started to turn on the producers this year, at times balking at large compensation packages, throwing out managers and installing penny-pinching replacements.
...
Now, philosophies have begun to change: Diversification in portfolios isnt the same hot ticket, and companies are focusing more resources on core areas, often selling off assets to reinvest in more profitable plays and to pay off debt, Kipp said.
...
If youre still weighted toward gas, you have problems, Foss said.
...
Across the oil and gas industry, more companies are moving to pay down debt before taking other measures to boost shareholder value, like share buybacks and dividends.
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