Credit crisis affecting oil, gas companies

Many oil and gas companies in Colorado are scrambling for cash, the first signs of a slowdown in the state’s unprecedented energy boom.

Although the energy sector is among the healthiest in the nation with giants such as ExxonMobil flush with cash, many smaller companies that largely depend on bank loans to fund exploration and production are finding it harder and more expensive to run their operations.

Wall Street’s meltdown has led most banks to charge higher interest rates on loans, and some have stopped lending altogether. Add to that weak oil and gas prices, and many companies are cutting back capital expenses and shrinking their drilling plans.

This somber outlook comes as Gov. Bill Ritter works to overhaul drilling rules and pushes a ballot initiative to raise severance tax revenues — efforts that the industry warns would discourage investment and jobs.

“We were immune to the financial crisis for a while, but now its rippling through the industry and affecting anybody doing energy exploration and production,” said Bill Croyle, a partner in
Denver-based Western Energy Advisors. “The debt market for oil and gas has dried up, so companies are cutting back capex programs which slows down drilling and production.”

Experts have yet to gather information on how the credit crunch and declining prices of oil and gas are hurting production in Colorado.

The number of operating rigs in Colorado — an indicator of work on the ground — was down to 106 in the first week of October, compared with 119 rigs in the first week of September and 123 rigs in the first week of May, according to Houston-based Baker Hughes Inc.

Prices in the Rockies have been sliding for months.

In early September, the Rockies average spot price of gas plummeted below $1 per million British thermal units after a section of the Rockies Express pipeline from Steele City, Neb., to Mexico, Mo., was shut down to test the strength of its steel.

Many companies shut down wells and cut back production, prompting the spot price to recover somewhat, climbing back to about $4 to $5 per million Btu in the middle of last month.

The REX pipeline went online the last week of September but prices began going down again — this time due to fears of recession, weak demand, inadequate pipelines to take local production to other markets, and persistent weakness in natural gas futures.

On Tuesday, the Rockies average spot price hovered between $2.50 and $2.80 per million Btu, nearly half the level from a month earlier and about $4 cheaper than nationwide prices, according to energy consultant Platts/McGraw-Hill. Gas futures for next month delivery stood about $6.50 per million Btu at the New York Mercantile Exchange, roughly 75 cents less than a month earlier.

“Basically we are in the shoulder season and there isn’t much demand for natural gas,” said Sheetal Nasta, a Platts’ markets editor.

Declining credit is harder to track but evident.

Three weeks ago, Denver-based Antero Resources lowered its purchase agreement with Dominion Resources for drilling rights in Pennsylvania to $347 million from the original $552 million because of financing problems. Last week, Chesapeake Energy of Oklahoma City, which drills for oil and gas in the Rockies, cut another $1.5 billion from its capital budget for two years to shore up cash as credit vanishes.

“If you ask most banks, they will tell you oil and gas is considered a positive industry, but I think that still doesn’t matter. Banks are having issues internally, causing them not to lend money and tightening the credit market,” said Kyle Hranicky, executive vice president and energy group head at Wells Fargo.

Rocky Mountian News


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