Oil price news, oil and gas analysis, energy supply & demand, oil technology, gas and oil reserves, alternative energy Oil price news, oil and gas analysis, energy supply & demand, oil technology

Energy Insights: Energy News: Spillover effect: Oil price crash bankrupting 'small oil'

 Energy News

<% if 0 then %> <% end if %>
old news articles

Spillover effect: Oil price crash bankrupting 'small oil'



Sherri McDaniel is already feeling the sting of the drop in crude oil prices from more than $115 per barrel in June to less than $50 in early January. She is president of ATEK Access Technologies, a small Minneapolis firm that owns TankScan, a wireless monitoring system that keeps track of fluid levels in oil tanks. Oil companies that use the system are starting to postpone orders, as they take a cautious approach to spending.

"In the oil fields, they are starting to pull back pretty heavily," McDaniel said. "They are literally taking tanks and laying them down on their sides." As a result, she explained, "we have a number of big orders that are temporarily on hold."

ATEK Access Technologies is one of many small and midsize firms that are already feeling the effects of lower oil prices. The causes of the decline are complicated, but they are an outgrowth of the domestic shale oil boom and a decision by OPEC, the cartel of oil-producing countries, not to rein in its own oil production in response. The result has been a price war.

Some big oil firms are already cutting capital budgets and jobs in response to lower oil prices, but it is smaller players in the industry that are feeling the pain most acutely.

A derrick hand works on an oil rig drilling into the Bakken shale formation outside Watford City, North Dakota.
Getty Images
A derrick hand works on an oil rig drilling into the Bakken shale formation outside Watford City, North Dakota.

More than 20,000 small and midsize firms drive the "hydrocarbon revolution" in the U.S. that has helped the oil and gas industry thrive in recent years, and they produce more than 75 percent of the nation's oil and gas output, according to the Manhattan Institute for Policy Research's February 2014 Power & Growth Initiative Report. The Manhattan Institute is a conservative think tank in New York City.

A sustained decline in prices could lead to layoffs at these firms, say experts. "The energy industry has been one of the job-growth areas leading us out of the recession," said Chad Mabry, a Houston-based analyst in the energy and natural resources research department of boutique investment bank MLV & Co. in New York City. "In 2015, that changes in this price environment," he said. "We're probably going to see some job losses on a fairy significant scale if this keeps up."

Growth of jobs in the oil and gas industry greatly outpaced the private sector from 2007 to 2012, according to the U.S. Bureau of Labor Statistics. There was 40 percent growth in jobs in oil and gas, with 162,000 new jobs created, compared to 1 percent job growth in the private sector. By November 2014, 215,200 people worked in oil and gas extraction alone. And with job-related fields such as mining and quarrying factored in, employment in the industry hit 869,000, the BLS found.

Many of the new jobs are well-paying. Average hourly earnings in oil and gas extraction were $31.62 for nonsupervisory workers in October and $40.79 for all workers.

McDaniel said ATEK Access Technologies has the staying power to withstand the drop in oil prices. Her firm owns three brands that have combined revenues of $50 million and collectively provide jobs for 200 employees. However, she believes many owners are in a weaker position to wait it out.

Companies on the brink

The small firms that are hurting range from exploration ventures to consultancies.

Last week a small central Texas oil producer, WBH Energy Partners, filed for Chapter 11 bankruptcy protection. The financial troubles reportedly began in September when Minnesota debt investor Castlelake declined to provide more funds under a credit facility. The 3-year-old company had more than $30 million in liabilities and more than $10 million in assets. It had about 2,600 net acres of oil and gas land in North Texas Barnett shale combo play, a region rich in shale that overlaps with oil formations. The filing demonstrates how small oil producers are feeling the squeeze on two fronts—falling oil prices and spooked investors.

Many industry experts say the struggles small players are facing are a harbinger of things to come, since there are many overextended producers who have not hedged their production well enough—a task that has gotten harder since big banks have exited the physical commodities business.

Under pressure from an activist investor who wanted liquidity, Trevor Spagrud, president and CEO of Hyperion Exploration, a publicly traded junior light oil and gas company in Calgary, Canada, was preparing in December for the sale of the roughly 4-year-old company to a Chinese firm, Tri-Win International Investment Group.

With drilling each well costing $3 million to $4 million when it used horizontal multistage fracking techniques, Hyperion was undercapitalized to deliver a "highly repeatable rate of return" in the immediate future, Spagrud said. Hyperion's team, about 16 people at its peak, had shrunk to eight as the company prepared for the sale.

Read MorePrice plunge puts oil patch jobs at risk

"We could have tried to raise equity," he said. "When an activist investor gets involved, they quickly want full liquidity. We were somewhat hamstrung by that mandate. We have entered into a transaction to do that."

Spagrud, an engineer, is planning to start another venture in the industry once the deal is completed. "It's been frustrating for so long, you just want to move on," he said.

At ClearHedging, a 2.5-year-old firm that provides risk-management hedging advice to oil and gas producers, Chicago-based executive director Brad Carmody said that while current clients are still using its services, new business is "definitely quiet." With prices so low, he explained, "there's no interest in hedging at all."

He and partner A.J. McNally, based in the Greater New York City area, are now figuring out how to pivot in a new direction. "At the time we got into the business, the industry was booming. The price of oil was high," Carmody said. Now they're looking at "How do we apply our skill set outside of oil and gas?"

Small vendors—ranging from those who lease out oil rigs to teams that assist in drilling and completing wells—are particularly vulnerable. Many operators who might need their services have been doing their capital budgeting for 2015, said MLV's Mabry, adding, "We've seen a pretty traumatic response. There are hundreds of millions in capital that won't be spent."

Industry's downward slide

For small and midcap firms in the industry, MLV was projecting a 10 percent to 15 percent growth in capital spending before prices plunged. It is now expecting a 20 percent to 25 percent decline, he said.

"Everyone is on edge," Mabry said. "The companies we talked to said they haven't even gone back to their drilling contractors. Their vendors have come to them and said, `I know things are getting tight next year. We're willing to negotiate on rates and work with you in this environment.'"

Some firms that serve the oil and gas industry are finding the lower prices have an upside. TempoIQ, a 14-employee start-up in Chicago, is among them. It offers a cloud-based software system that helps clients interpret data that come from sensors. Oil companies—comprising about 15 percent to 20 percent of its customer base—have used its technology to track data such as pressure readings from sensors on oil pipelines, said Justin DeLay, co-founder and chief marketing officer.

DeLay believes sensors—and the technology to interpret the data they gather—will likely become more important as oil companies look for efficiencies in their operations to offset lower fuel prices. "There is a big push for preventative maintenance," he said. "They are looking for early warning signs something is about to break."

In the meantime, clients in other industries have more money to invest in technology now that their fuel costs have decreased, he said. "What we've been hearing is, `Hey, we've wanted to do a sensor project like this for a while but hadn't had the ability to do it because we haven't had enough money to do it,'" said DeLay.

Printer Friendly version...

Site Map | Privacy Policy | Terms & Conditions | Contact Us | ©2004