This is the most Bearish thing i have ever posted (but its from The Wall Street Urinal so you can be sure it only tells one side of the story):
March 4, 1998
Reality Bites: Nervousness
Creeps Into the Oil Patch
By JONATHAN WEIL
Staff Reporter of THE WALL STREET JOURNAL
Finally, the state's oil patch is getting nervous.
For most of the past four months, petroleum executives in Texas had
shrugged their shoulders as oil prices sank from $21 a barrel to just over
$15 currently. It's sure to bounce back, they thought. But an unusually
warm winter, the easing of tensions in the Persian Gulf, increased supplies
from OPEC nations and declining demand from economically troubled
Asian countries are taking their toll on the oil industry's optimism.
"Thirty days ago, the mood was still uniformly good, even though people
were beginning to wonder why it was so good," says Scott Anderson,
executive vice president of the 2,000-member Texas Independent
Producers and Royalty Owners Association, based in Austin. But in the
past week or two, he says, "I've begun to hear the souring of
expectations."
Now, in fact, many Texas petroleum exploration and production
companies are considering cutting their 1998 spending budgets from the
levels they set at the end of last year, when oil prices were projected to
stay around $19 a barrel. If oil prices don't rebound in the next few
weeks, industry watchers say, widespread cutbacks in drilling activity are
a sure thing.
"Many companies may pull some of their projects off production until they
see what prices will be in the long term," says Victor Burk, managing
director in Houston for Arthur Andersen's energy-industry group.
Some companies have already taken action. Last week, Dallas-based
Wiser Oil Co., with revenue of $87.8 million last year, announced it's
slashing its capital-expenditure budget for 1998 by nearly 20%, to $52
million. "We didn't want to go further into debt," says Andrew Shoup,
president and chief executive of Wiser, whose production is split about
60-40 between oil and gas. Frank Pitts, owner of Pitts Oil Co. in Dallas,
says he's cutting back about 20% this year and expects others to follow
suit.
Ray Plank, chairman and chief executive officer of Apache Corp. in
Houston, says, "You can rest assured we're looking very closely at our
budget." About a quarter of Apache's wells are in Texas. Mr. Plank says
his company, which had $1.2 billion in revenue last year, will be evaluating
its budget on a "quarter-by-quarter" basis.
Companies are also warning that they may have to adjust their balance
sheets to reflect the diminished value of undeveloped assets if prices don't
rise before May, when the state's publicly traded independent producers
announce their earnings. Houston-based Nuevo Energy Co. told analysts
last month that it would slash its asset values if prices don't perk up by late
March.
Producers worry that diminished book values would soon translate into a
reduced ability to raise money from banks, which look to reserves for
collateral when making loans, or from the public equities markets, which
have punished nearly all oil-related stocks lately. "If we're looking at really
low commodity prices, I wonder whether the banks will continue lending
to the smaller oil companies as aggressively as they have in the past," says
Richard Hunter, a securities analyst at Lighthouse Capital Management
Inc. in Houston.
It's too early to speculate about industry layoffs. At the least, though,
sustained low prices probably would slow the state's employment growth
to national levels, says Bill Gilmer, senior economist with the Federal
Reserve Bank of Dallas's Houston office. Last year, the oil and gas
industry added 9,000 new jobs.
"What you're seeing is a real air of caution," says Mr. Gilmer, senior
economist at the Fed's Houston office. "The bloom is certainly coming off
the rose in the oil business."
Meanwhile, oil-field service and equipment companies, such as offshore
and land-based drillers that lease rigs to exploration and production firms,
are making preparations, too. Mr. Plank, for one, reports that he has
already been approached by a few drillers offering to slash their lease rates
by up to 15%.
At Houston-based offshore driller Global Marine Inc., about a third of
whose rigs are in the Gulf of Mexico, day-rates have jumped fivefold since
1992, fueled by swelling demand and a short supply of rigs. Today about
96% of all offshore rigs world-wide are being leased. But if enough
producers cancel projects so that figure drops below 90%, Global Marine
and others probably will have to cut prices, says David Herasimchuk, vice
president for Global Marine.
"We're a little perplexed that things haven't gotten worse sooner," Mr.
Herasimchuk says. "Nobody expected this to last. But that perception
seems to be changing."
Ripples also are moving through other parts of the Texas economy. Mr.
Gilmer reports that several energy firms are canceling their plans to lease
larger quarters in downtown Houston and elsewhere. "Where they were
begging for space last year, now they're saying maybe they can do without
it altogether," Mr. Gilmer says.
The saving grace amid all this handwringing: Prices for natural gas, which
at $2.24 per thousand cubic feet are 12% higher than a year ago. For Mr.
Pitts, whose company's production is about 60% gas, that's good news.
In one sense, Mr. Plank at Apache says he's looking forward to a
slowdown, which he expects to last through the year. In that case, smaller
companies, especially highly leveraged ones, may be forced to sell off
properties at depressed prices. "If the prices for oil are low, a number of
the smaller players won't have the profitability to stay in business," he says.
"And we will eat them." |
