Oil and gas independents struggle to keep afloat
New Orleans CityBusiness
WHILE ATTENTION has focused on megacompanies and
megamergers recently, smaller independent oil and gas
producers have been slowly bleeding.
Many independents in Louisiana and other states have coped
with layoffs, operating losses and production cuts as they
struggle to survive in the gloomy oil market. Industry watchers
expect the reduced drilling activity to continue well into 1999.
Over the course of this past year, companies have seen the
price of a barrel of oil fall from $18 to about $11. Natural gas
prices at the Henry Hub in Louisiana have dropped less, from about $2.25 a year ago to under $2
last week.
Some producers with reserves largely in natural gas have fared better than others with reserves
focused on oil. But it is clear that few companies have remained unscathed by falling prices.
Companies big and small have slowed production over the past year. According to [ Baker Hughes
Inc. ] , an oil field service company, 634 rigs operated in the U.S. as of Dec. 23, down 37% from
a year earlier (see chart p. 47). About three-quarters of rigs nationwide produce natural gas.
Louisiana, the second largest producing state behind Texas, had 144 working rigs, down 34%
from a year earlier.
As production has dropped, layoffs have followed. Shell, [ Texaco ] , [ Conoco ] and other large
companies have announced job cuts, but several Louisiana producers have already taken action.
According to the state Department of Labor, oil and gas extraction jobs totaled 51,500 in
November, down 2,300 from the same period last year. New Orleans extraction jobs have been
stable this past year.
Don Brigs, president of the Louisiana Independent Oil and Gas Association, which represents
about 650 producers statewide and 55 locally, says companies are operating as lean as they
possibly can.
One company had shut in half of its 300 marginal wells and lay off about half of its 17
employees, Briggs says. "That is very much the picture across the board with every small oil and
gas producer I've talked to," he says.
But companies can't afford too many layoffs because they need to keep operating when prices go
up, Briggs says. So producers decide to absorb some operating losses.
"The problem is, if you fire everybody, you can't get them back," Briggs says. Maintenance
work also has slowed. "If you have maintenance problems on a well, you don't perform it, you
shut it in," Briggs says.
Many U.S. oil and gas producers have found that the poor oil market, coupled with lack of
control over prices and supply, has left them with few options but layoff and other cost-cutting
measures, says Kenneth Beer, oil analyst and partner at local investment firm Johnson Rice &
Co.
"The only thing you can control is cost," Beer says.
The emergence of advanced technology, such as 3-D seismic imaging and horizontal drilling,
have opened new doors for producers. But advanced technology "doesn't negate $10 oil prices,"
he says.
Despite the bad market and reduced drilling activity, which Beer predicts will send several
companies into "survival mode" in 1999, some independent producers are seeing breaks of
daylight in the gloomy skies.
Local independent Energy Partners Ltd. hopes it has found a niche by forming alliances with
large oil companies to develop mature properties that are unprofitable for the oil giants to pursue
alone, says James Orth, EPs vice president of production and engineering. EPL was founded in
1997 by Richard Bachmann, former president of The Louisiana Land & Exploration Co.
Large companies often choose to focus on their high-producing assets and sell off mature
properties to smaller producers. With the advent of advanced technology in the '90s, some
independents have been able to scoop these properties, find the remaining oil and as deposits and
exploit them at a profit.
EPL's partnership allows the owner of a mature property to retain ownership while still realizing
a share of the potential profits. Typically, EPL serves as operator and provides most of the capital
for production.
EPL sees such partnerships as a better approach for big companies in a climate of low oil prices,
capital spending cuts and industry consolidation, Orth says. EPL's recent work includes two
projects with Chevron--and a properly acquisition from Shell.
"Despite the current pricing environment we will continue to pursue opportunities that were set in
motion in 1998," says Or, former LL&E vice president of production.
[ Stone Energy Corp. ] , a publicly traded oil and gas company in Lafayette, has seen its revenue rise
even though its net income has declined. The company took in $27.4 million in revenue for the
third quarter ended Sept. 30, up 72% from a year earlier.
Successful exploration and production activity in early 1998 led to a jump in production, says
Mike Finch, Stones chief financial officer. Third-quarter production volume totaled about
760,000 barrels of oil and 7 billion cubic feet of gas, up 108% an the same period in 1997.
Steady declines in rig and service costs over this past year have also enhanced production for
Stone in the low-price oil market, Finch says. The company has four wells drilling now and
expects to keep producing in 1999.
Finch says about 70% of Stone's reserves are natural gas, and at current prices, production is still
profitable. The company also says its employment will probably hold steady.
We don't anticipate a huge amount of growth in the number of employees, but we don't anticipate
any layoff either," he says.
Local independent [ Taylor Energy Co. ] is preparing to put a new rig on-line in early January,
owner Patrick Taylor says. As the only stockholder, Taylor does not have the oversight of
investors, unlike many other independents.
Taylor halted production in June because oil prices had plummeted, but now hopes to take
advantage of low drilling costs. Daily rental rates for jackup rigs are about $22,000, down more
than 50% from early 1998, according to [ Global Marine Inc. ] , a Houston drilling contractor that
surveys rig rates.
But Finch and Taylor say their companies are exceptions to the troubles of many independent
producers. Even though costs are low, "very few independents are going to be able to drill
because they simply don't have the revenue and they don't have the investment dollars flowing
in," Taylor says.
In addition, the inevitable layoffs mean workers will turn to other industries for jobs and not
return to the oil fields when times improve, as happened after the '80s oil bust. Losing many
workers no will make rebuilding tougher for companies, Taylor says. ****** Copyright New
Orleans Publishing Group Inc. Jan 04, 1999
(Copyright UMI Company 1999 All rights reserved.)
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Publication Date: January 04, 1999
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