Good News for Independents | Russell T. Rudy Energy LLC
A recent article in “World Oil” cites two studies by consulting firm, Wood Mackenzie, which concludes that the independent energy segment of the industry is not in imminent danger. Many industry commentators had predicted dire consequences for small oil and gas producers as a result of this Fall’s recalculation of reserves used in Reserve Based Lending (RBL).
Wood Mackenzie examined the financial health of the top 26 domestic independents and determined that the larger ones, like their major counterparts, have the flexibility to continue operations for at least the next year. While the consultants concede that the group has seen absolute debt levels increase, this is not a catalyst for cataclysm. In fact, at least two thirds of Lower 48 production is operated by companies with either no RBL exposure, or do not have redeterminations until next year. Of the larger independents with determinations pending, most could accommodate a reserve estimate cut of up to 50%.
Clearly some companies will experience financial difficulties in the short to intermediate term, and some portion of these will inevitably fail. However, Wood Mackenzie predicts that these will be companies with pre-existing structural issues. Even in the case of distressed operators, the impact on domestic oil and gas production levels will be minimal. Companies can be restructured or assets sold, and creditors and purchasers have every incentive to keep properties producing.
Wood Makenzie did acknowledge exposure through expiration of hedging contracts. As advantageously priced contracts expire, operators are faced with taking their chances in the spot market or entering into new hedges at lower prices. The consultants feel that some operators will be forced into the latter option by anxious creditors.
Lower prices and tight credit will inevitably result in lower activity levels in the oil patch, and this could have some effect on production. However, there will still be some incremental drilling. Wood Mackenzie observes that while many analysts point out the drain on liquidity this would involve, most ignore the resulting incremental production associated with this activity.
In short, Wood Mackenzie predicts that the demise of independent operators, as a group, is premature and most will live to fight another day.
To read the article in its entirety, please go http://www.worldoil.com/news/2015/10/09/near-term-financial-risks-for-us-independents-exaggerated-wood-mac .
