January 7, 2015

Deep Debt Keeps Oil Firms Pumping

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January 6, 2015 | The Wall Street Journal |  Erin Ailworth, Russell Gold, Timothy Puko

The Wall Street Journal reports that, even as crude prices plunge, U.S. producers plan to continue pumping oil. Why? Many went into deep debt during the oil and gas boom. Now, they need to keep drilling to meet those financial obligations. The Wall Street Journal writes:

“Before crude prices began falling, U.S. oil and gas producers were able to acquire leases and drill wells even if that meant outspending their incomes. Debt was used to bridge the cash shortfall so that companies could develop oil fields in Texas, North Dakota and newer locations including Colorado.”

The U.S. Energy Information Administration predicts that despite lower oil prices, U.S. oil production will continue to grow in 2015. This is because companies “need to service that debt,” The Wall Street Journal writes.

“The group is not positioned for this downturn,” Daniel Katzenberg, an analyst at Robert W. Baird & Co told the Wall Street Journal. “There are too many ugly balance sheets.”

To complicate the issue, the price at which companies can turn a profit varies widely. As Inside Energy’s Jordan Wirfs-Brock reported, break even prices in North Dakota, for example, can range from $28 per barrel to $85 per barrel.  She writes:

“The oil industry is not uniform. Every company and every oilfield is different. Factors like local geology, tax structure, and amount of debt the company owes mean the break even price varies from place to place, rock to rock, and company to company.”

Consumers who drive are, of course, enjoying lower gas prices, but this can hurt in states like North Dakota and Wyoming where energy carries the local economy. Inside Energy’s Emily Guerin and Stephanie Joyce explored the question: ‘Where Do Falling Oil Prices Hurt Most?’

“…fewer rigs means fewer drilling jobs, fewer loads of gravel to buy, and fewer miles of road to build in those places. The impact goes beyond those counties though–it also hits the budget office in the [North Dakota] state capitol, Bismarck.”

Watch Emily Guerin’s piece on PBS Newshour for more context on what falling oil prices mean for small oilfield-related companies in North Dakota.