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'Storm Front Gathering' for E&P in 2009

The CFOs of U.S. oil and gas exploration and production (E&P) companies see trouble ahead. Chief among the worries is the credit crisis gripping financial markets, which continues to unfold, according to a study by BDO Seidman LLP

In a survey, 57% of CFOs at U.S. E&P companies said "credit capacity restraints, including access to capital" will be their greatest financial challenge in 2009, followed by "falling oil or natural gas prices" (21%). Nearly three-quarters (72%) expect the economic crisis to impact their ability to borrow or extend bank debt in 2009.

However, in the past 12 months only 26% of respondents had oil or gas exploration projects significantly delayed or terminated, they said. Among those who did, 80% said lack of capital was the reason. The survey found a mixed bag when it comes to drilling cost expectations: 52% expect increases while 34% expect decreases.

"Energy companies have remained relatively unscathed by the downturn this year and continued with record profits. However, a storm front is gathering for 2009," said Charles Dewhurst, BDO national energy industry practice leader. "The survey was conducted as oil prices and demand continued to drop -- and this volatility, combined with the state of the economy, has energy companies treading more cautiously."

The findings are from the "BDO Seidman Natural Resources 2009 Outlook Survey," which examined the opinions of 100 chief financial officers at U.S. E&P companies. The survey was conducted in October and November.

"When you look at the multinationals, they have for many years looked inward to self-finance their projects and that puts them clearly in a strong position to ride the storm of the credit crunch," Dewhurst told NGI. "The midsize and smaller oil companies are in a different situation entirely. They are very dependent on the equity and debt markets for financing projects. Both of those are very tight right now, and that is clearly going to continue through much of 2009 in terms of their ability to survive."

Companies that played a conservative game and budgeted for $40/bbl oil when prices were around $150/bbl are in a much better position than those that were counting on high commodity prices to last, Dewhurst said. He noted that the survey did not differentiate between oil-directed and gas-directed companies.

"I think smaller companies are also going to be handicapped by the borrowing arrangements that they have with banks, which are typically structured around a borrowing base formula based on their reserves," he said. In other words, loans collateralized with reserves whose values are shrinking could get called. "Some companies could find themselves having to pay off some overborrowings against their borrowing base, and that could be very difficult for them."

And consolidation is coming. "A combination of strong, well financed [international oil companies] and the fact that many independents will have credit problems in 2009 will almost certainly increase the deal flow as we see it," said Dewhurst, who is not alone in predicting that some independent E&P companies will represent value plays for acquisitive majors (see NGI, Dec. 1).

Other findings of the BDO survey include:

The national telephone survey was conducted by research firm Market Measurement Inc.

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