2016 brings more pain to U.S. shale companies as crude sinks

Pain is quickly growing more acute in the new year at beleaguered U.S. 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 lower. In the last year, the SIG index of oil companies .EPX fell 42 percent, compared with a 0.6 percent decline in the Standard & Poor's 500 index .SPX.
SandRidge Energy Inc (SDOC.PK), 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 on Wednesday. The stock last traded on the NYSE for less than 20 cents a share.
Though companies ended 2015 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 a downdraft showing no signs of abating soon.
Oil CLc1 is down 10 percent since Dec. 31 to $33 a barrel, falling away from the crucial $50 to $60 level that many shale companies need for long-term survival.
"You are going to see a lot more bankruptcies and restructurings this year," said Bill Costello, an energy analyst at Westwood Holdings Group Inc. "This year is going to be much worse for companies with weak balance sheets."
He believes Penn Virginia Corp (PVA.N), Midstates Petroleum Company Inc (MPO.N), Ultra Petroleum Corp (UPL.N), GoodRich Petroleum Corp (GDP.N) and Resolute Energy Corp (REN.N), all small producers, will have to restructure.
Representatives for those companies did not comment.
Swift Energy Co (SFYWQ.PK), which stopped making some debt payments in December, filed for Chapter 11 on the last day of 2015.
Many companies have worked during the price declines of the last 20 months to push out debt maturities to curb repayment risks. According to filings by about 45 U.S. shale oil producers only a few have debt maturing this year.
"Those that have near-term maturities realized they do not have the cash to retire the bonds, so instead they 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. For example, Chesapeake Energy Corp (CHK.N) last month was unable to persuade a number of holders of its near-term debt to swap it for a later maturity, so in essence it could not push out its debts as much.
Chesapeake, which Sterne Agee estimates will spend nearly half of its earnings before interest, taxes, depreciation, amortization and exploration expense on interest payments this year, has a $500 million bond maturing in March but analysts said the company has ample cash for payment.
Chesapeake declined to comment.
It is not even business as usual for Wall Street favorites, typically those seen as low-cost operators with the sweetest spots to drill. Pioneer Natural Resources Co (PXD.N) said on Tuesday it raised $1.4 billion in equity, but the company will not be able to fund its 2016 drilling budget from only oil and gas sales.
It will instead rely on a mixture of 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