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Energy Companies Expected to Steer Through Credit Crunch

November 10, 2008
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The global financial tsunami is something the energy industry will steer itself through, El Paso Corp. CEO Doug Foshee said Thursday, noting that the current crisis summons memories of the one precipitated in the energy industry by Enron Corp.'s 2001 bankruptcy.

"For lack of a better description with regard to the current capital markets environment, as we say here in Texas, this ain't our first rodeo," Foshee said during a quarterly earnings call (see related story). Foshee took over at El Paso when the company was near bankruptcy and still attempting to steer itself through the Enron-precipitated crisis.

"We have experienced, engaged and talented professionals that have been through much tougher environments than this one relative to our own company in the past six years," Foshee said. "So, we know how to operate our company in an environment where capital constraint and speed, flexibility and contingency are key."

What Foshee said in his company's quarterly earnings call has been said in one way or another by many energy company executives in the past few weeks. The credit market turmoil is not confined to one part of the energy sector or only the small companies. And even though most of them are telling analysts that they are adequately financed for what may be a long haul, many companies appear to be preparing for what may be an a very lean and destabilizing 2009, with a variety of potential impacts.

Consider the following news that NGI reported in just the past week:

For E&Ps, the companies that are funding exploration developments with free cash flow most likely will be the least affected by the current financial market turmoil, Douglas-Westwood Ltd. analysts said in a review that was issued last week. However, if they haven't already, the smaller and less liquid independents and other cash-strapped energy companies are probably reviewing their investment plans to decide where to cut back, said the UK-based consultancy.

Douglas-Westwood joined a growing chorus of industry prognosticators forecasting cutbacks across the energy sector in the months ahead (see NGI, Nov. 3; Oct. 27; Oct. 20).

Most of the long-term and expensive oil and natural gas developments worldwide "seem to be moving forward largely unaffected," Douglas-Westwood's report stated. The independents and marginal field developers "are more likely to be impacted. Some cutbacks in exploration efforts and review of development plans is likely."

An "important force" in driving energy prices will continue to be OPEC, noted the Douglas-Westwood team. However, "fundamental supply constraints will not disappear. Decline of oil production from existing fields is a major challenge, and continued investment in the sector is vital if we are to avoid another 'supply crunch' and price spike in the short term.

"In the longer term, our views are unchanged, and global oil supply limits are likely to be tested again during the next decade."

For the majors, the credit crunch probably have a limited impact because the largest integrated companies are conservative spenders that focus on large-scale developments, the consultants noted. Mid-tier international oil companies (IOC), however, may face "possible exploration cuts," and they might have to review their investment plans because their access to cash and to bank loans may be more limited.

Facing the biggest financial hurdles will be the independents and national oil companies (NOC), noted Douglas-Westwood.

Independents take more chances and many times undertake marginal developments, which requires "much heavier dependence on external finance." For those reasons, they may have to cut back on exploration and delay their investment plans, said the consultancy. For NOCs, the "availability of credit for project finance may force a review of their investment plans in some cases."

One area unlikely to suffer from a lack of exploration dollars is the deepwater, Douglas-Westwood said. The deepwater is a "higher-cost development" region that is "typically led by major IOCs that are funding from cash flow." That means the projects will be "less reliant on external finance."

IHS Global Insight researchers analyzed the impact of the financial crisis on exploration and production (E&P) activity around the world, also expect to see cutbacks across the energy sector in the months ahead.

If there's financing already in place, such as for gas pipelines as El Paso has secured, projects won't be held up. However, projects scheduled to be built after 2012 may begin to feel a squeeze in the next couple of years, IHS reported.

"The vast majority of projects with finance in place due for completion in the 2008-12 time-frame are expected to move forward," IHS researchers said. However, many E&Ps already are cutting their costs through the end of this year, and those cuts, which are already being extended through at least 2009, will cut into access to oil and natural gas reserves.

ExxonMobil Corp., BP plc and Chevron Corp. recently said their capital spending programs are on track despite the financial distress. All of them are cash cows, IHS noted, and all of them and most of the other majors should have plenty of cash to fund their oil and gas projects across the globe.

Most impacted, though, will be the independents that were buying undeveloped -- and unproven -- leaseholds in North America and elsewhere. Now many of the producers, including leading gas producer Chesapeake Energy Corp., have put some of their prized unconventional gas prospects up for sale to ensure that there is enough liquidity to fund other projects, IHS noted. Others are expected to soon follow.

With the share prices down across the board in the energy sector, financial analyst Gil Yang, who works for Citi Investment Research, on Friday boosted his ratings to "buy" from "hold" for three gas producers: EOG Resources Inc., Southwestern Energy Co. and Quicksilver Resources Inc.

"Natural gas prices still face pressure from strong supply growth and high inventory levels, but with the rig count falling and colder winter weather approaching we think that investors should increase their exposure to this sector at this time," Yang wrote in a note to clients.

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