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 Oil prices tumbled by more than a fifth this month to 12-year lows
70 percent below mid-2014 levels and traders brace for more declines
as world production keeps outpacing demand.
Yet many of around 50 listed U.S. independent oil producers and
scores of smaller ones need $40-$60 a barrel to break even,
according to several analyst. A longer spell of $30 oil will
confront them with stark choices: bankruptcy, debt writedowns in
return for deep concessions to creditors or fire sales of assets at
a time when potential buyers are skittish.
"There's no place to make cuts anymore. There's not much else you
can do now. Companies are losing money on a monthly basis. It's bad
everywhere," said Raymond Lasseigne, president of privately-held TMR
Exploration in Bossier City, Louisiana. "I went through the bust in
the 1980s and it's beginning to feel like that again."
The deepest downturn of the pre-shale era lasted five years and it
took two decades for prices to fully recover.
 In the heart of the Eagle Ford formation in south Texas, where the
fracking boom unlocked vast supplies, contributing to the global
abundance that is now sinking prices, some say the latest plunge may
be just too much.
"We're going to reach a breaking point here," said Jill Potts, an
owner of Summit Oilfield Supply in Cuero, Texas. Her business sells
valves, fittings, hoses and other equipment to shale companies and
so is exposed to the industry's ups and downs. "If anybody says they
are making money in the oilfield they are lying," Potts said.
The once crowded trailer parks housing workers are nearly deserted,
stacks of drill pipes rust and idled rigs spread over acres lay down
on their sides.
NO LEVERS
Since the downturn started, agile independents have slashed spending
50-70 percent, steered drilling rigs to sweet spots and fracked
wells more intensely to lift output.
Barclays estimates cuts will reach $73 billion by the end of 2016
and most producers by now have run out of levers to pull while hopes
for a near-term recovery are all but vanishing.
"Folks who never thought about bankruptcy or a Plan B, are starting
to," said Charles Beckham, a restructuring law partner at Haynes &
Boone in Houston, noting a recent uptick in business.
For many the crunch time may come in April during the semi-annual
reviews of banks' lending to the energy sector. Last October, many
lenders mostly maintained their credit lines because oil futures at
the time signaled prices would recover this year.
In the last few weeks, however, U.S. benchmark futures <CLc1> have
tumbled to average around $33 a barrel for this year, nearly a third
below the $47 a barrel 2016 forecast banks had several months ago,
suggesting a credit pullback.
 Major U.S. banks are already boosting provisions for troubled energy
loans.
"There will be more moves to tell borrowers to bring assets to the
marketplace," one energy lender at a regional bank said.
Falling prices force producers to write down the value of their main
assets - oil and gas reserves - that serve as a basis for lending
and company valuations.
For example, Devon Energy Corp <DVN.N> has over the past year taken
$15.5 billion in non-cash charges.
Investment bankers say the equity and bond markets have already shut
for all but few issuers, such as Pioneer Natural Resources <PXD.N>,
which sold $1.4 billion worth of shares this month.
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Hedges, which shielded producers from the worst of the slump last
year, are expiring and a depressed outlook means companies have a
harder time locking in higher prices for future production.
Estimates from Reuters and Bank of America Merrill Lynch show U.S.
producers hedged a third or less of projected 2016 output.
WORSENING SQUEEZE
Investors are also balking at companies' efforts to swap short-dated
debt for longer maturities. Citi estimates exploration and
production firms have $109 billion in outstanding high-yield debt
maturing through 2025.
Only $500 million of bonds mature this year before payments start
piling up to peak at $10 billion in 2019.
The bad news is that borrowers struggle just making interest
payments. Energy Information Administration data shows that U.S.
companies with onshore oil operations used 80 percent of operating
cash flow for debt service in the second quarter.
With prices nearly $25 lower now, the squeeze has only gotten worse.
High-yield energy bond spreads hit record highs last week and
analysts at Bernstein Research warn a third of listed U.S. oil
exploration and production companies were now at risk of bankruptcy.
Wells Fargo argues that oil below $40 is "not sustainable for
virtually any producer," predicting a wave of deals with creditors
and bankruptcies in the next 12 to 18 months.
"(The) further prices fall from breakevens, the better the argument
for just going ahead and restructuring," said James Spicer of the
bank's high yield research group.
In the Eagle Ford's DeWitt county, some pumpjacks, the so-called
nodding donkeys, sit idle, a possible sign that for some producers
prices no longer even cover operating costs.
"A lot of them are just burning cash at these prices," said
Christian Ledoux, senior portfolio manager at South Texas Money
Management. "Either they shut-in the wells and they don't produce at
all or they close down the business entirely."
With no bottom for crude in sight, most potential company or asset
sales are on hold, dealmakers in Houston say. But even if there were
buyers, debt-laden producers might be better off filing for
bankruptcy and starting with a clean slate, they say, instead of
selling off reserves to settle with creditors and ending up with
nothing to drill.
(Reporting By Terry Wade and Anna Driver; Additional reporting by
Swetha Gopinath in Bangalore and Mike Stone and Jessica Resnick-Ault
in New York; Editing by Tomasz Janowski)
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