Sub-$30 Oil Fans Fears of U.S. Shale Endgame

Across oil fields from Texas to North Dakota fears are growing that crude's plunge below $30 a barrel is more than just another market milestone and marks a countdown to an endgame for many shale producers that so far have braved the 18-month downturn.

Oil prices tumbled by more than a fifth this month to 12-year lows 70 percent below mid-2014 levels and traders brace for more declines as world production keeps outpacing demand.

Yet many of around 50 listed U.S. independent oil producers and scores of smaller ones need $40-$60 a barrel to break even, according to several analyst. A longer spell of $30 oil will confront them with stark choices: bankruptcy, debt writedowns in return for deep concessions to creditors or fire sales of assets at a time when potential buyers are skittish.

"There's no place to make cuts anymore. There's not much else you can do now. Companies are losing money on a monthly basis. It's bad everywhere," said Raymond Lasseigne, president of privately-held TMR Exploration in Bossier City, Louisiana. "I went through the bust in the 1980s and it's beginning to feel like that again."

The deepest downturn of the pre-shale era lasted five years and it took two decades for prices to fully recover.

In the heart of the Eagle Ford formation in south Texas, where the fracking boom unlocked vast supplies, contributing to the global abundance that is now sinking prices, some say the latest plunge may be just too much.

"We're going to reach a breaking point here," said Jill Potts, an owner of Summit Oilfield Supply in Cuero, Texas. Her business sells valves, fittings, hoses and other equipment to shale companies and so is exposed to the industry's ups and downs. "If anybody says they are making money in the oilfield they are lying," Potts said.

The once crowded trailer parks housing workers are nearly deserted, stacks of drill pipes rust and idled rigs spread over acres lay down on their sides.

NO LEVERS
Since the downturn started, agile independents have slashed spending 50-70 percent, steered drilling rigs to sweet spots and fracked wells more intensely to lift output.

Barclays (BCS) estimates cuts will reach $73 billion by the end of 2016 and most producers by now have run out of levers to pull while hopes for a near-term recovery are all but vanishing.

"Folks who never thought about bankruptcy or a Plan B, are starting to," said Charles Beckham, a restructuring law partner at Haynes & Boone in Houston, noting a recent uptick in business.

For many the crunch time may come in April during the semi-annual reviews of banks' lending to the energy sector. Last October, many lenders mostly maintained their credit lines because oil futures at the time signaled prices would recover this year.

In the last few weeks, however, U.S. benchmark futures have tumbled to average around $33 a barrel for this year, nearly a third below the $47 a barrel 2016 forecast banks had several months ago, suggesting a credit pullback.

Major U.S. banks are already boosting provisions for troubled energy loans.

"There will be more moves to tell borrowers to bring assets to the marketplace," one energy lender at a regional bank said.

Falling prices force producers to write down the value of their main assets - oil and gas reserves - that serve as a basis for lending and company valuations.

For example, Devon Energy Corp has over the past year taken $15.5 billion in non-cash charges.

Investment bankers say the equity and bond markets have already shut for all but few issuers, such as Pioneer Natural Resources (PXD), which sold $1.4 billion worth of shares this month.

Hedges, which shielded producers from the worst of the slump last year, are expiring and a depressed outlook means companies have a harder time locking in higher prices for future production. Estimates from Reuters and Bank of America Merrill Lynch show U.S. producers hedged a third or less of projected 2016 output.

WORSENING SQUEEZE
Investors are also balking at companies' efforts to swap short-dated debt for longer maturities. Citi estimates exploration and production firms have $109 billion in outstanding high-yield debt maturing through 2025.

Only $500 million of bonds mature this year before payments start piling up to peak at $10 billion in 2019.

The bad news is that borrowers struggle just making interest payments. Energy Information Administration data shows that U.S. companies with onshore oil operations used 80 percent of operating cash flow for debt service in the second quarter.

With prices nearly $25 lower now, the squeeze has only gotten worse. High-yield energy bond spreads hit record highs last week and analysts at Bernstein Research warn a third of listed U.S. oil exploration and production companies were now at risk of bankruptcy.

Wells Fargo (WFCNO) argues that oil below $40 is "not sustainable for virtually any producer," predicting a wave of deals with creditors and bankruptcies in the next 12 to 18 months.

"(The) further prices fall from breakevens, the better the argument for just going ahead and restructuring," said James Spicer of the bank's high yield research group.

In the Eagle Ford's DeWitt county, some pumpjacks, the so-called nodding donkeys, sit idle, a possible sign that for some producers prices no longer even cover operating costs.

"A lot of them are just burning cash at these prices," said Christian Ledoux, senior portfolio manager at South Texas Money Management. "Either they shut-in the wells and they don't produce at all or they close down the business entirely."

With no bottom for crude in sight, most potential company or asset sales are on hold, dealmakers in Houston say. But even if there were buyers, debt-laden producers might be better off filing for bankruptcy and starting with a clean slate, they say, instead of selling off reserves to settle with creditors and ending up with nothing to drill.

Reporting By Terry Wade and Anna Driver