Sept. 26–Increasingly optimistic oil and natural gas companies are planning to ratchet up their borrowing this fall, according to a new survey from the international law firm Haynes and Boone.
The report found that 78 percent of firms surveyed this month planned to increase borrowing. More than one-third expected to increase borrowing by 20 percent or more.
The report, released Wednesday, also found that high oil prices are prompting companies to lock in prices for 50 to 60 percent of their 2019 production.
West Texas Intermediate crude oil generally hovered between $45 and $60 last year. Now it’s closer to $70, while the European benchmark Brent oil price hit a four-year high Tuesday when it topped $82.
The Haynes and Boone report also looked at what factors were worrying oil and gas producers.
“In prior years, producers were worried about a sudden drop in commodity prices or high costs of oilfield services,” said Kraig Grahmann, head of Haynes and Boone’sEnergy Finance Practice Group, in a statement. “Now, when asked about the biggest challenge facing oil and gas industry participants, survey respondents were most concerned about midstream capacity constraints in transporting production to market.”
The pipeline capacity shortage was cited by 42 percent as the greatest challenge. Oilfield services cost was the second biggest concern followed by price volatility, cost of capital and “other.” Trade war tension, at 6 percent, was at the bottom of the list.
“It indicates that people expect the price — if there’s volatility would not fall below their break-even costs,” said Buddy Clark, co-chair of Haynes and Boone’sEnergy Practice Group.
That point is in the mid-$50 range for many drillers, Clark said, but could be lower in some parts of the Permian Basin.
The report didn’t specifically focus on the Permian Basin, but pipeline bottlenecks have been a major concerns there for much of the year. New pipelines have been greenlit by midstream companies, but much of the capacity won’t be on line until at least next year.
Producers received some good news recently when Houston-based Plains All American revealed that the expansion of its Sunrise Pipeline would be ready by November, months ahead of schedule, according to news reports.
There have also been natural gas pipeline constraints over the year in the Marcellus and Utica shales, covering Pennsylvania, West Virginia and neighboring states.
The firm, which tracks oil and gas bankruptcies, also had a warning about excessive debt. Industry bankruptcies are way down from from the post-oil price crash peak of 2016. But the debt involved in oil and gas bankruptcies in 2018 have already exceeded all of 2017.
Companies need to be cautions about debt, Clark said. But he said the last downturn, which reached it low point in early 2016, is “not so far in the rear view mirror.”
The U.S. Energy Information Administration recently reported that the oil and gas companies it surveyed had reduced debt for seven consecutive quarters, and the debt was at its lowest point since the third quarter of 2014.
“The latest worst is now behind us,” Clark said. “It’s now recover mode. But who knows how long this recovery will continue.”
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