(Media Release) American history is littered with oil busts that created big winners and losers.
Now, as the cracks appear in the latest energy boom, the forces of failure and opportunity are stirring again. Resolute Energy, a Colorado company that borrowed big in the boom, is among those in an endgame that is being played up and down Wall Street and in the vast oil fields that new drilling methods have opened in recent years.
It is a struggle that could take place at scores of other companies, leading to thousands of layoffs, as well as losses for banks and investors. At the same time, new fortunes stand to be made.
When Resolute set out three years ago to buy thousands of acres in the oil patch of West Texas, lenders showered the company with hundreds of millions of dollars. But the company had little expertise in the costly and complicated horizontal drilling that it employed on its new property.
Such easy money has abruptly come to an end, mostly because oil prices have plunged, potentially making life much harder for companies like Resolute. Banks slashed the size of the company’s credit line late last year and imposed new lending conditions. Its stock has plummeted, and now trades for mere pennies.
The sudden drop in oil prices, incited by fears of a global supply glut and waning demand, caught the oil industry and its lenders by surprise. Many companies, which only a few months ago were the toast of the high-yield debt and initial public offering markets, suddenly cannot raise additional equity or sell bonds. A few lenders have started reining in bank lines and more are expected to tighten loan terms in the coming months.
“If you give an oil guy a dollar, he’s going to use it to drill,” said H. B. Juengling, a vice president of investor relations at Resolute. “But the available funding is starting to close down.”
Over the last five years, oil and gas companies have issued bonds and taken out loans that are together worth $1.2 trillion, according to data from Dealogic. A cutback in drilling is expected to affect communities across the country. The boom created at least 200,000 jobs at oil and gas companies over the last five years, according to an analysis of data from the Bureau of Labor Statistics.
The latest boom was defined by risk-taking that involved deploying new technologies in oil fields that were once thought not productive drilling sites. As the free flow of credit dwindles, however, energy analysts expect much more caution from an industry that has been willing to bet the farm on increasingly ambitious projects.
Signs of trouble have brought out Wall Street’s bottom feeders. They are sniffing around companies that appear to have crippling debt loads, companies like American Eagle Energy and Quicksilver Resources.
Resolute recently cut a deal to buy time, borrowing from a hedge fund called Highbridge Capital Management to help pay off previous debts. Highbridge is taking the risk that its loan may not be paid back in full, but it may have calculated that it can profit by charging a high interest rate on its $150 million loan, and by seizing assets in a potential bankruptcy. The loan carries an interest rate of more than 10 percent and is backed by Resolute’s vast array of oil fields in Wyoming, Utah and Texas, which could skyrocket in value if oil prices recover.
Other opportunistic investors are firing up their spreadsheets.
“The single best opportunity to invest is distressed debt in energy,” David M. Rubenstein, co-founder of the Carlyle Group, said in January at the World Economic Forum in Davos, Switzerland. Mr. Rubenstein added that one promising strategy might be to “buy the debt at a discount and take control of these companies.” The Blackstone Group and Apollo Global Management say that they are raising billions of dollars to invest in energy assets.
But the energy companies are not going to give up easily.
The squeeze is tightest when companies face a deadline to pay back money they have borrowed. But many firms won’t face such pressures for many months — and the oil price may have recovered by then, particularly if the cut in drilling reduces supply. Many firms hope to weather this turbulence. And Wall Street may simply be wrong in predicting far-reaching distress in the energy sector. Investment firms often promote big ideas as a way to raise money, which they may then struggle to invest for lack of opportunities.
Still, (Free-Pr-Online.com) many analysts say that oil prices could remain below $60 a barrel for the rest of the year. OPEC has chosen not to cut production as a way of propping up prices, a move that seems intended in part to deflate the shale boom in the United States, which has caused a surge in domestic oil production.
The longer prices stay low, the less financial sense it makes to keep drilling.
Resolute is determined to ride out the slump. The company was founded, like many other entrants in the red-hot oil industry, by a group of longtime oilmen and private equity investors.
The company’s chairman, Nicholas J. Sutton, was in semiretirement when a Chevron executive told him the oil company was looking to sell portions of the Aneth oil field in southeastern Utah, including a large patch on the Navajo Indian reservation.
Mr. Sutton and his other co-founders teamed up with private equity backers to buy the Aneth property in 2004. At the time, the field’s reserves totaled 1.5 billion barrels of oil — considered by geologists one of the world’s “giant” oil fields.
In 2009, Resolute merged with an investment firm run by Thomas O. Hicks, a former owner of the Texas Rangers baseball team and the Liverpool soccer club, and became a publicly traded company.
The merger infused Resolute with cash, but its debut as a public company brought expectations to increase its revenue more quickly.
Aneth was a giant field, but its reserves were gradually declining. The shale revolution sweeping the United States promised more explosive growth.
In late 2012, Resolute borrowed roughly $150 million in the bond market and acquired premium acreage in the Permian Basin of West Texas, one of the nation’s hottest shale plays.
At first, Resolute planned to drill vertically in the Permian, a process the company’s founders had done for years. But after watching competitors with nearby wells have success with horizontal drilling — which involves boring into shale at a horizontal angle — Resolute switched course.
The company’s foray into horizontal drilling proved costly. One of its rigs caught fire, for instance, Mr. Juengling said.
“When you go into a new area, you have to spend a lot of upfront capital,” said Carin Dehne-Kiley, an energy analyst with Standard & Poor’s. “But the costs were higher than they anticipated and the price of oil is lower than they anticipated.”
The company’s high leverage — the amount of debt relative to its profit — left Resolute little room for error.
To raise cash, Resolute planned to sell some of its oil fields in Aneth to a private investment fund, but the deal fell through in March.
The fall in oil prices increased the pressure on the company. Resolute’s oil reserves — which banks used as collateral — were suddenly worth much less. Resolute’s bank lenders decreased the company’s credit line to $330 million from $425 million.
Resolute had to use the $150 million loan from Highbridge, the hedge fund, to pay off some of its outstanding bank line balance.
In recent months, many oil producers have said the lower prices are forcing them to cut back on production, But Resolute has not announced any plans for the year.
“If anyone says they know what oil prices are going to be, they are wrong.” said Mr. Juengling, who has worked in the industry for 30 years. “No one knows how low it will go or how long it will take to go back up.”