Daily Management Review

Crude Price Slump Results in Zombies Appearing in US Oilfield


Crude Price Slump Results in Zombies Appearing in US Oilfield
As oil prices lurch further away from levels that allow them to profitably drill new wells and bring in enough cash to keep them in business, U.S. shale oil companies are merely hanging on for life since they are drained by a 17-month crude rout.
Companies that have just enough money to pay interest on mountains of debt, but not enough to drill enough new wells to replace older ones that are drying out are being termed as oil and gas "zombies," dozens of which have been created by the slump.
Most investors and analysts say they tend to have exceptionally high debt loads and face the prospect of shrinking oil reserves, even though there is no single definition of a zombie.
According to the Moody's rates, there are about two dozen oil and gas companies whose debt is toward the bottom of its junk bond scale and these companies broadly fit that description of a zombie.
Some of that group's more prominent members, as mentioned by investors and analysts include SandRidge Energy Inc., Comstock Resources and Goodrich Petroleum Co.
In a process some describe as "slow-motion liquidation", the zombie companies have curbed costly drilling and are using revenue from existing production to pay interest and other expenses in order to stay alive.
Many companies risk getting caught in a vicious circle of shrinking oil reserves, falling revenue and declining access to credit as bankruptcies and defaults loom because the cutbacks in new drilling have been so deep, experts say.
The zombie group is set to grow, say experts, as long as oil prices stay below the estimated break-even level of $50 a barrel. "Zombies" became the topic of a keynote address at a big energy conference in Houston on Thursday due t  the fact that so many oil companies are struggling.
Banks that have loosened loan terms to avoid defaults might be just allowing companies to postpone "their day of reckoning", said Thomas Califano, vice chair of the restructuring practice at the law firm DLA Piper.
"They can just be zombies. They can pay their interest, there's no growth and they are cannibalizing their assets," he said.
Experts cite the example of SandRidge that has been rated by Moody's at B3 negative or lower. This rating accorded to at least 25 other U.S. exploration and production companies, is a category for speculative investments with significant credit risks. With an output of less than 10,000 barrels per day, many of these companies are quite small.  
"SandRidge is an example where they have enough cash on the balance sheet to service debt for next three years and likely can't grow their assets in this price environment," Michael Roberts, a principal at the Carlyle Group which invests in energy companies, said at a recent seminar in Houston.
SandRidge said that it was working to reduce its interest payments and recently spend $190 million to add some production and reserves.
Crude futures now forecast prices will not return above $50 until early 2018 with oil prices near new seven year lows below $37 a barrel Clc1. This has prompted many to ask the same vexing question: "How long can you survive without having a new well come on?” says Deborah Williamson, a Dykema restructuring attorney in San Antonio.