Joe tracked down the WSJ article on the oils--it is an excellent article--- and I copy andpaste it here for those studying the oil market-- September 11, 1998
Oil Patch Braces for Losses
Amid Price Slump, Mergers
By CHRISTOPHER COOPER
Staff Reporter of THE WALL STREET JOURNAL
Continued low oil prices are straining the finances of
energy producers, possibly leading to loan defaults and
more oil-patch mergers, some bankers and analysts say.
With oil prices down about 40% from a year ago and no
rebound in sight, revenue is sliding at many energy
companies, which are beginning to feel a cash-flow
squeeze. Particularly hard hit are small and mid-size
producers that are more dependent on oil than natural gas.
In recent weeks, natural-gas prices also have turned soft,
adding to the worries, although few expect those lower
prices to persist.
"No one has defaulted yet, but conditions are poor and
getting worse," says Josh Gonze, energy analyst at
Standard & Poor's Ratings Services. "This is a time when
banks and other lenders are on alert."
With oil prices stuck between $13 and $14 a barrel, S&P
has slashed debt ratings on several energy companies, and
banks are cutting back lending for exploration and
production. In response, some independent producers are
trying to sell assets to raise cash, and others have put
themselves up for sale. (Although their earnings have
declined, most major oil companies, with large refining,
marketing and chemicals business, have the financial
strength to muddle through the downturn.)
Humbled Highflier
Chesapeake Energy Corp. in some ways typifies the
overleveraged oil-patch company. A one-time highflier,
the Oklahoma City company said in July that it would
look for a possible buyer. The company sold $711 million
in new debt and preferred stock last spring, when analysts
expected oil prices to recover by fall. It used the proceeds
to go on a $200 million acquisition spree and to repay
bank debt.
But with little hope for a price recovery, Chesapeake is
groaning under $920 million in long-term debt. In the
second quarter, it posted a loss of $235 million, after a
$216 million write-down of oil and gas assets, on revenue
of $188.8 million. "To go out and borrow money from a
bank in this market is nearly impossible," says Marc
Rowland, Chesapeake's chief financial officer.
Oil-producing properties, though still commanding
reasonable prices, are starting to flood the market. Sellers
include Pioneer Natural Resources Co., Dallas. One of
the nation's largest independent producers, it hopes to sell
about $550 million in assets by year end. The company,
formed from the 1997 merger of Mesa Inc. and Parker &
Parsley Petroleum Co., has cut capital spending this year
by about 17% to $500 million, to conserve cash.
Tiny Garnet Resources Corp., Nacogdoches, Texas, has
seen its revenue fall about 60% through the first half of this
year. The company, which trades on the over-the-counter
bulletin board, hasn't paid interest on its $15 million in
debentures all year and is in technical default on a $7.6
million loan from Chase Bank of Texas, a unit of Chase
Manhattan Corp. Garnet Resources has agreed to merge
in a stock transaction with another small company, Aviva
Petroleum Inc., Dallas, pending a stockholder vote this
week. But Aviva isn't in much better shape; because of
"significant losses," the company said it is in technical
default on a $7.7 million bank note of its own.
Onerous Terms
Private investors and financiers have met the gloom with
offers of cash-on onerous terms. The Dallas investment
firm Hicks, Muse, Tate & Furst Inc., hitherto shy of
commodities investments, recently agreed to pay $250
million for 62% of Coho Energy Inc., a Dallas producer,
and at least $180 million for a minimum 17% stake in
Triton Energy Ltd., a cash-starved oil and gas concern. In
return for getting a Triton stake for the equivalent of
$17.50 a common share-above the current depressed
price but well below the company's 52-week high of $45
-- Hicks Muse will get four seats on Triton's 10-member
board.
Meanwhile, bankers are making loans for purchases of oil
and natural gas reserves at the right prices, but fewer
loans for exploration and production.
Loan Pricing Corp., a New York bank-consulting firm,
said about $33 million in oil-patch loans were made in the
first half of this year, down only slightly from last year. But
this year, 40% of the loans were made for merger activity,
up from 23% in the first half of last year.
"I fully expect to see more merger and acquisition
activity," says Dennis Petito, managing director of energy
lending for First Chicago NBD Corp., who oversees
about $4 billion in energy lending. Still, he says he is
comfortable with his current portfolio, largely because
banks have been much more cautious this decade than
they were in the 1980s.
More Conservative Lending
When prices fell in the mid-1980s to near $10 a barrel, oil
companies went out of business, taking more than a few
banks with them. In those days, Mr. Petito says, banks
lent money based on companies' reserves, even if they
weren't producing oil and gas from them. Now, most
loans are based on actual production. "I like to sleep at
night," Mr. Petito says.
Tom Foncannon, vice president and head of energy
lending for Norwest Corp., Minneapolis, which has $200
million in energy loans, says that some banks, caught up
last year in the glow of high oil prices and spurred by
competition, may have begun lending at terms he
considered too loose. "I haven't seen a lot of fallout yet,"
he says. "But I still think there were some excess. I think
some banks loaned too much. I guess time will tell."
With credit harder to find, some companies are turning to
lenders of last resort, such as Range Resources Corp. of
Fort Worth, Texas. It has a six-year-old division that
makes expensive short-term loans to high-risk oil-patch
clients. Range, itself the product of an energy merger of
Lomak Petroleum Inc. and Domain Energy Corp., loans
money in return for a production royalty interest.
Hardy Murchison, a Range vice president, acknowledges
the company's loans carry somewhat stiff terms -- 15% to
25% rates of interest. But it currently has loans
outstanding of about $70 million, with another $50 million
in loans under consideration. "Our backlog is the highest
it's ever been," Mr. Murchison says. "You have guys out
there who are frankly in a cash-flow crunch who need
money up front just to keep going. These are people who
can't get a loan anywhere else."
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