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Asoilpricesplummet,mountingdebtcatchesup

withBasinproducers
ByCliffordKraussandMichaelCorkeryNewYorkTimes|Posted:Saturday,February13,
201611:45pm

Onthe15thfloorofanofficetowerinMidlandloomsa5footlongtrophyblackbear,shotbythe
sonofanexecutiveatCazaOil&Gas.
ButitisCazathathasrecentlyfallenpreytoadifferentkindofpredatorstalkingtheTexasoilpatch:
toomuchdebt.
Whilecrudepriceshavedroppedmorethan70percentoverthelast20months,areckoninginthe
nationsvastoilindustryhasonlyjustbegun.Untilrecently,companieswereabletorideoutthe
slumpusinghedgestoselltheiroilforhigherthanthelowmarketprices.
Inrecentmonths,however,mostofthosehedgesexpired,leavinganumberofoilcompanieslowon
cashandunabletopaytheirdebt.Morebroadly,energyexecutivesandtheirlendersarerealizingthat
arecoveryinoilpricesisatleastayearaway,toolongformanycompaniestoholdout.
Energyexecutivesandtheirbankersarebracingforaprolongeddownturnthatcouldremakethe
energyindustryinawaynotseensincetheturmoilofthelate1990sgaverisetomegamergerslike
ExxonMobil.
Ifpricesholdatsuchlowlevelsoiltradednear$28onTuesdayasmanyas150oilandgas
companiescouldfileforbankruptcy,accordingtoIHS,anenergyresearchfirm.
Whilethatrepresentsarelativelysmallsliceoftheoverallindustry,therearehundredsofother
companiesthathadpiledondebttogrowfromtinystartupsintosignificantplayersinthenations
shaleoilboom.Nowtheyarelikelytobeacquiredortheirassetssoldoff.Asmuchasathirdofthe

oilindustrycouldbeconsolidatedasaresultofthedownturn,accordingtooneestimate.
Todayourgoalistosurvive,DannyCampbell,chairmanofthePermianBasinPetroleum
Association,beganhiswelcomingremarksatadinnerhereforoilexecutiveslastmonth.Keepyour
nameinthephonebookandyourdebtlow.
TherearenowvirtuallynowellsintheUnitedStatesprofitabletodrill.Thathasforcedsome
companiesintoafatalspiral,producingoilsimplytosatiatetheirlenders.Othersaregetting
desperate.InlateDecember,CazaessentiallysolditselftoaNewYorkinvestmentfirmtopayoffits
lenders.
Investorsareonedge.AreportthatChesapeakeEnergy,amajornaturalgasandoilcompany,hired
lawyerstohelprestructureitsmorethan$10billionindebtsentitssharesplungingonMonday,
promptingthecompanytodenypubliclythatitwaspreparingforbankruptcy.
Theoilindustryregularlyundergoesboomsandbusts.Butthedownsideofthiscyclemayprove
moreextreme,andtheshakeoutmessier,thankstotheeasymoneythatfloodedtheindustryfrom
hedgefunds,privateequityfirmsandtaxadvantagedinvestmentstructurescalledbusiness
developmentcompanies.
Theindustrywillbepermanentlydamaged,saidStevenH.Pruett,chiefexecutiveofElevation
Resources,aleadingMidlandoilcompany.
Energy&ExplorationPartnersofFortWorth,forexample,borrowedfromatleast24hedgefundsto
helpacquirethousandsofacresoflandinTexasasoilpricestopped$100abarrel.Thecompany
filedforbankruptcyinDecember,afteritslenderscouldnotagreeonhowtosaveit.
Asthelossesmount,investorsandlendersarealreadylayingthegroundworkfortherebound,
snappingupassetsinfiresalesandmakingnewloans.Buttheseareuneasydays,evenfor
opportunists.Burnedbyforecaststhatpredictedoilwouldrecoverlastyear,manyinvestorsfearthat
theycouldbetooearlyiftheyjumpinnow.
Theindustryscrushingdebtloadenergycompaniesonaveragehavetwiceasmuchleverage,or
borrowedmoney,ascompaniesintheStandard&Poors500stockindexisalsohavingsome
perverseeffects.
Someoilcompaniesarekeepingupproductionsimplytogenerateenoughcashtomakedebt
payments,accordingtobankersandenergyexecutives.
Bankslookingtoshoreupcollateralontheirloanswhichistypicallyacompanysoilreserves
arerequiringproducerstodrillnewwellstoprovethattheirreservescanactuallyproducethe
oil.MajoroilcompanieslikeExxonMobilandRoyalDutchShell,whichhaveamplecashcushions,
mayendupbenefitingfromtheturmoil,scoopingupbrokencompaniesortheirassets.

Buteventheglobalgiantsarenotimmunetotheslump,astheirprofitsdwindleandcreditrating
firmsdowngradetheirdebt.OnTuesday,Anadarkoslasheditsquarterlydividendmorethan81
percenttoconservecash.AndExxonannouncedlastweekthatitwascurtailingitsstockbuyback
program.Theworstpainishittingthesmallerplayers:thousandsofcompaniesthatsnappedupland
inplaceslikeWestTexasandNorthDakota,usingbillionsinborrowedmoney.
Manyofthesecompaniesoperatedlikestartupswithlittlecontroloverexpensesandwithouta
proventrackrecordtohelpthemsurviveaslump.NoneofthatseemedtoworryWallStreet,which
showeredthecompanieswithdebt.
Inthesummerof2014,Energy&ExplorationPartnersborrowedmorethan$700milliontoacquire
thousandsofacresinEastTexas.
Thelandwasrichinoil,butitcostmoretoproducebecauseoftherudimentaryinfrastructureinthe
remotearea.Foratime,Energy&ExplorationPartnershadtopayfordieselgeneratorstopowerthe
rigsbecausetherewaslimitedelectricitysources,accordingtoapersonbriefedonthematterwho
spokeontheconditionofanonymity.
Whenoilpricestopped$100abarrel,thecompanycouldeasilycoveritsproductioncostsand
interestpayments.Butallthatchangedwhen,atSaudiArabiasurging,theOrganizationofthe
PetroleumExportingCountriesresistedcallstocutproductioninlate2014,leadingtoaworldwide
glutandsendingpricesintoafreefall.
Energy&ExplorationPartnersboughthedges,allowingthecompanytosurviveformostoflastyear
bysellingoilat$70abarrel.
Butwhenthosehedgesranoutlatelastyear,thecompanywaslowoncash.Itdeclaredbankruptcyin
December.
Nationally,just15percentofoilandgasproductionishedgedin2016,comparedwith28percentof
productioninthefourthquarter,accordingtoIHS,theresearchfirm.
Withoutthecushioningfromhedges,oilpricessoonwillnolongercoverthecostsofproduction.In
Midland,theheartoftheoilrichPermianBasin,asmanyas40decommissioneddrillingrigshave
beenstackedalongInterstate20sincethefall,abitterreminderformanythatexplorationinthefields
isgrindingtoahalt.
Asrigsgooffline,companiesareusingtechnologiestosqueezeasmuchoilastheycanoutof
existingwells.Butifanagingwellbreaks,manycompaniesarenotspendingthemoneytofixit,and
executivespredictarapiddeclineinproductionasshalewellspeterout.
Nowsensingapossiblebottom,anewwaveofWallStreetmoneyisfloodingtheoilpatch,tryingto
catcharecovery.

AdventureExplorationPartnerssoldallofitsWestTexasoilfieldsfor$210millionjustasprices
werecollapsinginlate2014.Afewmonthslater,withoilalreadybelow$50abarrel,PaulL.Lucas,
thecompanyschiefexecutive,andhispartnersbegantodipbackinagain.With$50million
committedbyKayneAndersonCapitalAdvisorsofLosAngeles,thecompanystartedacquiringnew
acreage.AdventureExplorationPartnersisnotdrillingyet,becausethepriceisnotright.Were
hopingtoseepricesstabilizeandrecoversometimein2017,Lucassaid.
ForDavidM.Zusman,chiefinvestmentofficeratTalaraCapitalinNewYork,oilhasreachedan
inflectionpointthatheisnotgoingtomiss.
Hisinvestmentfirm,whichmanagesabout$500millionforendowmentsandpensions,boughtup
CazaOil&GasinDecember.
CazawaspayingdoubledigitinterestratestoabusinessdevelopmentcompanymanagedbyApollo,
accordingtopeoplebriefedonthematter.Theoilcompanyneededawayout.JustbeforeChristmas,
thecompanysoldequitytoTalara.ThedealgaveTalaracontroloftheoilcompany,whileseverely
dilutingtheholdingsofCazasexistingshareholders.
Flushwithnewequity,CazawasablepayoffthedebttotheApollomanagedfund,aswellasother
debttoYorkvilleAdvisors,ahedgefundinMountainside,NewJersey.
Freedfromcostlyinterestpayments,Cazanowhastheflexibilitytoholdontoitsprizedshale
holdingsontheborderofTexasandNewMexico.
SittingrecentlyinaMidtownManhattanconferenceroomadornedwithcolorcodedmapsofthe
PermianBasin,Zusmanwassureaboutthecomingshakeoutintheoilpatch.
Thehavesandthehavenotsarebecomingclear,hesaid.