Rigs contracted by Apache Corp drill for crude oil locked tight in shale in west Texas' Permian Basin near the town of Mertzon, Texas, in this October 29 2013 file photo. Picture: REUTERS
Rigs contracted by Apache Corp drill for crude oil locked tight in shale in west Texas' Permian Basin near the town of Mertzon, Texas, in this October 29 2013 file photo. Picture: REUTERS

BENGALURU/HOUSTON — Pain is quickly growing more acute in the new year at beleaguered US shale companies as a global supply glut sinks crude further to 11-year lows, putting added financial stress on the most heavily indebted.

Debt and equity investors have all but given up on the exploration and production sector as oil prices tumble. In the past year, the SIG index of oil companies fell 42%, compared with a 0.6% decline in the Standard & Poor’s 500 index.

SandRidge Energy, a once high-flying Oklahoma-based shale company backed by billionaire investors Leon Cooperman and Canada’s Prem Watsa, was delisted by the New York Stock Exchange last week.

The stock last traded for less than 20c a share.

Although companies ended last year with enough cash on hand to cover interest payments for well into next year, they cannot afford to drill new wells. The gloomier outlook is expected to prod more of them to restructure and give up on trying to ride out the downturn.

Oil is down 10% since December 31 to $33 a barrel, falling away from the crucial $50-$60 level many shale companies need for long-term survival.

"You are going to see a lot more bankruptcies and restructurings," said Bill Costello, an energy analyst at Westwood.

"This year is going to be much worse for companies with weak balance sheets."

He believes Midstates Petroleum, Penn Virginia, Ultra Petroleum, Resolute Energy and Goodrich Petroleum will have to restructure. Swift Energy filed for chapter 11 bankruptcy protection on the last day of 2015.

Many companies have worked during the price declines of the past 20 months to push out debt maturities to curb repayment risks. According to filings by about 45 US shale oil producers, only a few have debt maturing this year.

"Those that have near-term maturities realised they do not have the cash to retire the bonds, so instead are exchanging those bonds into longer-dated more senior securities," said Reorg Research analyst Kyle Owusu.

But some investors do not want to take on more risk. Chesapeake Energy was unable to persuade a number of holders of its near-term debt to swap it for a later maturity, so it could not push out its debts as much.

It is not even business as usual for low-cost operators with the sweetest spots to drill. Pioneer Natural Resources has raised $1.4 bn in equity, but will not be able to fund its drilling budget for this year from only oil and gas sales. It will rely on funding from asset sales, equity proceeds, cash and operating cash flow boosted by hedging.

"You’ve got oil that is down meaningfully in 2016, volumes are down, natural gas prices are low because of weather and there is very little in the way of hedging. Then you’ve got a lot of these companies that were very aggressively financed with debt," said Mark Hanson, oil analyst with Morningstar in Chicago. "It can get pretty ugly."

Reuters