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Oil Drillers Trapped in a High-Debt-No-Cash Vicious Circle

Oil Workers

While OPEC and Russia are talking about freezing or even cutting crude oil production to restore the market balance – and pushing up prices in the process – rig drillers and manufacturers are struggling to make ends meet.

It’s certainly been a tough couple of years for E&Ps in the U.S. and elsewhere, but it has been even tougher for drilling tech makers and contractors. For one, just like shale boomers, the drillers that made the boom possible have borrowed heavily, and are now facing the bill. For another, in order to survive when the price slide began, drillers seriously discounted their services —an act that hasn’t really helped their cash position.

Now, the drilling segment is trapped in something very much resembling a vicious circle.

E&Ps, hungry for more efficient drilling tech that will reduce their breakeven point even further, turn to cash-strapped drilling tech developers which need serious investments for research and development. On the other hand, these cash strapped innovators can’t continue to make high-risk investments. The already heavily indebted companies that survived the bust must focus on lower-risk investments that contribute to a more positive cash-flow in order to tackle their enormous pile of debt.

The problem is, of course, accessing this cash will not be easy. As Drillmec’s Gilberto Gallo accurately observes, the investments in new drilling tech typically fall on the contractors that use the rigs and associated equipment that developers design and manufacture. Yet contactors are right now working under uncomfortably short contracts in an uncomfortably depressed oil price environment and are not all too willing to splash out on innovation, necessary as it may be.

Help could come from the E&Ps that will ultimately reap the benefits of the efficiency innovations that drilling equipment manufacturers come up with, but the cash situation in the E&P segment is also tight.

Last week, a report from legal firm Haynes and Boone revealed that manufacturers and contractors are pessimistic about their debt situation, many expecting banks to cut the borrowing base by as much as 29 percent, with the average expectations for a 20 percent cut. Banks, meanwhile, anticipate a borrowing base reduction of 16 percent.

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Pressed into this tight corner, drillers are going for further asset sales (32 percent of respondents in the Haynes and Boone survey), loan negotiations (38 percent), and restructuring or seeking private equity support (13 percent for each of these). Besides, there are more bankruptcies on the way, and they won’t be just among E&Ps.

Though oil and gas producers have been adding rigs in the last few months, as crude oil prices started improving, the rig count increase hasn’t been pronounced enough to quench the worries of driller equipment manufacturers and contractors. That’s despite the fact that rig numbers have been rising for weeks in a row, and that, as of last Friday, they were at their highest since February, when crude touched a bottom of below $30 a barrel.

There is no way for drillers to pull themselves up by their bootstraps. Contractors and E&Ps may share some of the financial burden of making it through these tough times, but as already noted, even if they’re willing, they are not exactly blooming financially. Unless oil prices get closer to $60, quickly, and stay there for more than a couple of days, we’ll see a lot more bankruptcies among equipment manufacturers and drilling contractors, and when the pendulum swings back, E&Ps will have to pay through the nose for what they are now getting at a discount.

By Irina Slav for Oilprice.com

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